Corporate Financial Assignment

Question: Describe about the internal rate of return. Answer: Internal rate of return is superior to the Average rate of return in following ways; Under Internal rate of return, the net percentage of profit is zero or it is almost ignored since the cost of investment is weighted by the benefits that one derives from the investment. Under the Average rate of return, the actual value of the profit is represented in percentage for each of the dollars invested is taken in to the account. It is also noted that under Internal rate of return all gains that one derives are inherent to the value of money that one invests whereas under the average rate of return time factor is not taken account. Comparative study of NPV and IRR: Every organization is faced with the dilemma of making a choice between the projects. Net present value and the internal rate of return are two of the most common parameters which is the most common parameters used in the certain projects as both the criterion give contradictory outcome. This means that if one considers the NPV method but on the other side the same time IRR method favors another project. One of the advantages of NPV is that it is expressed as absolute terms while IRR is expressed in percentage terms. On the other hand, NPV makes the process of decision making easy while IRR does not offer the ease of decision-making. Variation in the outflow of cash will not effect the NPV while under IRR it variation in the cash flow will either show multiple or negative reflections. The purpose of NPV is to determine the surplus from the investment made in the project on the other hand IRR represents the state of neither profit nor loss. Conclusion: The report is prepared in accordance with the accounting principle and therefore, all the figures represent true and fair view of investment in equipment. A comparative study shows that IRR and NPV is more useful tool than the ARR and the pay back period. It is advisable for the management to retain the old equipment rather than investing in new equipment since the profitability index and the sensitivity analysis shows that old equipment is beneficial for the organization than investing in new equipment. Reference List Chen, C., Li, G. and Reynolds, A., 2012. Robust constrained optimization of short-and long-term net present value for closed-loop reservoir management.SPE Journal,17(03), pp.849-864. Guerra, M.L., Magni, C.A. and Stefanini, L., 2014. Interval and fuzzy Average Internal Rate of Return for investment appraisal.Fuzzy Sets and Systems,257, pp.217-241.