plans to withdraw $15,000 from the business at the end of each year for the
next 5 years. At the end of the fifth year, Sam plans to sell the business for
$110,000 cash. At a 12% discount rate, the equipment's NPV can be
calculated as follows:
Items
Years
Amount of cash
flow
Factor at
12%
Present value of
cash flows
Investment
cost
Now
$(70,000)
1
$(70,000)
Cost savings
1-5
$15,000
3.605
$54,075
Salvage value
5
$110,000
0.567
$62,370
Total
$46,445
Exit
Angela
ACCT310 Managerial Accounting
Unit 5: Capital Budgeting, Decentralization, and Performance and Investment Analysis
Learning map
Internal Rate of Return (IRR) Method
Revise: Internal Rate of Return (IRR) Method
Revise: Internal Rate of Return
(IRR) Method
Contact
Extras

Lesson path
1.
1.Introduction
2.
2.Learning material
3.
3.Interactive example
4.
4.Questions
5.
5.Summary
Introduction
The
internal rate of return
(IRR) is the interest rate (discount rate) that
results in a net present value (NPV) of zero. When the NPV is equal to zero,
the present value of the project’s cash inflows exactly equals the investment
outlay. The decision tree for both the NPV and IRR will yield the exact same
result.
The IRR methods consider the time value of money. Surveys show that the
IRR is most popular method, followed by payback period and NPV. Few
companies use the accounting rate of return (ARR).
In choosing among competing projects, the IRR may lead to the wrong
choice, whereas NPV is consistent in providing the correct signal.
With mutually exclusive projects, acceptance of one precludes the
acceptance of others.
Post audit
is a follow-up evaluation of capital-budgeting decisions.
The purposes of post-audits include the following:
To see that investment expenditures proceed on time and within
budget.

To compare actual cash flows with those originally predicted to
motivate
To have a careful and honest prediction
To provide information for the improvement of future predictions of
cash flows
To evaluate the continuation of the project
Exit
Angela
ACCT310 Managerial Accounting
Unit 5: Capital Budgeting, Decentralization, and Performance and Investment Analysis
Learning map
Internal Rate of Return (IRR) Method
Revise: Internal Rate of Return (IRR) Method
Revise: Internal Rate of Return
(IRR) Method
Contact
Extras
Lesson path
1.
1.Introduction
2.
2.Learning material
3.
3.Interactive example
4.
4.Questions
5.
5.Summary
Learning Material
Internal Rate of Return (IRR) Method

The internal rate of return (IRR) is defined as the interest rate that sets the
present value of a project’s cash inflows equal to the present value of the
project’s cost (the point where NPV is equal to zero).
The IRR is a rate used to evaluate acceptability of an investment; it equals
the rate that yields a NPV of zero for an investment.

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- Spring '11
- Scott
- Managerial Accounting, Net Present Value