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Unformatted text preview: Assuming that I have acquired $150,000 in cash to be used specifically for a distressed real estate purchase, a determination on whether or not to make the purchase would be financially feasible only if: (1) the Internal Rate of Return (IRR), or the rate of return on the appreciation in the value of the distressed property, is greater than the Weighted Average Cost of Capital (WACC) and (2) the Net Present Value (NPV) of the distressed property is positive. Internal rate of return (IRR) is the flip side of net present value (NPV) and is based on the same principles and the same math. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return, often a company's cost of capital. IRR, on the other hand, computes a break-even rate of return. It shows the discount rate below which an investment results in a positive NPV and above which an investment results in a negative NPV. It is the breakeven discount rate, the rate at which the value of cash outflows equals the value of cash inflows.of cash outflows equals the value of cash inflows....
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This note was uploaded on 03/01/2012 for the course ACCOUTNING 550 taught by Professor Abner during the Spring '11 term at DeVry Houston.
- Spring '11