From the course: Accounting Foundations: Managerial Accounting

Unlock the full course today

Join today to access over 22,600 courses taught by industry experts or purchase this course individually.

The internal rate of return method

The internal rate of return method

From the course: Accounting Foundations: Managerial Accounting

Start my 1-month free trial

The internal rate of return method

“

- The internal rate of return method, also known as the time-adjusted rate of return method or the discounted rate of return method, is similar to the net present value approach in that it emphasizes the profitability of investments and takes into account the time value of money. As a discounted cash flow method, it is superior to either the payback method or the unadjusted rate of return method. Some managers consider the internal rate of return method more difficult than present value method because the computations can be challenging. Other managers, however, prefer to analyze investment alternatives in terms of comparative rates of return, rather than net present values. The internal rate of return is defined as the true discount rate that an investment yields. Mathematically, the internal rate of return is the discount rate that yields a net present value of $0 when applied to the cash flows of an investment, both inflows and outflows. To determine the value of an investment…

Contents