IRR: The internal rate of return, or discounted cash flow rate of return, offers analysts a way to quantify the

rate of return provided by the investment. The internal rate of return is defined as the discount rate where the NPV of cash flows are equal to zero. The IRR can be calculated using trial and error (changing the discount rate until the NPV = 0). Generally speaking, the higher a project's internal rate of return (assuming the NPV is greater than zero), the more desirable it is to undertake the project. The rule with respect to capital budgeting or when evaluating a project is to accept all investments where the IRR is greater than the opportunity cost of capital. Under most conditions, the opportunity cost of capital is equal to the company's weighed average cost of capital (WACC). Advantages of Internal Rate of Return 1. Perfect Use of Time Value of Money Theory Time value of money means interest and it should high because we are sacrifice of money for specific time. IRR is nothing but shows high interest rate which we expect from our investment. So, we can say, IRR is the perfect use of time value of money theory. 2. All Cash Flows are Equally Important It is good method of capital budgeting in which we give equal importance to all the cash flows not earlier or later. We just create its relation with different rate and want to know where is present value of cash inflow is equal to present value of cash outflow. 3. Uniform Ranking There is no base for selecting any particular rate in internal rate of return. 4. Maximum profitability of Shareholder If there is only project which we have to select, if we check its IRR and it is higher than its cut off rate, then it will give maximum profitability to shareholder 5. Not Need to Calculate Cost of Capital In this method, we need not to calculate cost of capital because without calculating cost of capital, we can check the profitability capability of any project. Disadvantages of Internal Rate of Return 1. To understand IRR is difficult It is difficult to understand it because many student can not understand why are calculating different rate in it and it becomes more difficult when real value of IRR will be two experimental rate because of not equalize present value of cash inflow with present value of cash outflow. 2. Unrealistic Assumption For calculating IRR we create one assumption. We think that if we invest out money on this IRR, after receiving profit, we can easily reinvest our investments profit on same IRR. We seem to be unrealistic assumption.

3. Not Helpful for comparing two mutually exclusive investment IRR is not good for comparing two project

The internal rate of return (or IRR) is a common financial valuation metric used by financial analysts to calculate and assess the financial attractiveness / viability of capital intensive projects or investments. As the IRR is normally easier to understand than the result of a discounted cash flow (DCF) analysis (i.e. the net present value or NPV) for non-financial executives, it is often used to explain and justify investment decisions, although a good financial modeler should know that the IRR is after all an estimated value, especially when calculated in Excel, and should be used in conjunction with other financial metrics such as the NPV and comparable valuation multiples when presenting a business or investment case. So what exactly is the IRR? The IRR is the interest rate that makes the net present value of all cash flow equal to zero. In financial analysis terms, the IRR can be defined a discount rate at which the present value of a series of investments is equal to the present value of the returns on those investments. All projects or investments with an IRR that has been calculated in a financial modeling exercise to be greater than the Weighted Average Cost of Capital (or WACC) should technically be considered as financially viable and accepted. When choosing between projects or investments whose outcomes or performance are absolutely independent of one another, a good financial modeler should deem the project or investment with the highest calculated IRR to be the most financially attractive, so long as we continue to keep in mind that the IRR value also needs to be higher than the WACC. Modified Internal Rate Of Return (MIRR) The modified IRR (MIRR) is said to reflect the profitability of a project or investment more realistically than an IRR. The reason why this is so is because the IRR assumes the cash flow from an investment or project to be reinvested at the IRR, whereas the modified IRR assumes that all cash flows to be reinvested at the investors / firms cost of capital. The MIRR is used extensively in real estate financial analysis due to the nature and timing of cash flows and investments for real estate investments. Dividend IRR The ongoing financial returns to investors who own and retain the equity of a business or project is essentially by way of financial / cash dividend payouts. As equity investors are typically last in rank in the cash flow waterfall, and therefore face the greatest risk of not being paid should the investment turn sour when compared to holders of

other forms of ownership in the same investment, equity investors would therefore expect the highest return. The dividend IRR is therefore used extensively by equity investors to calculate and measure the discount rate at which the present value of cash dividend payouts equal the present value of equity investments.