Internal Rate of Return
INTERNAL RATE OF RETURN
Many companies wants to have a return on their investment in a few years and begin to evaluate their projects optimistically calculating an internal rate of real return not yielding results in the end. This does not end up being expected by the companies; According to the article the authors John C. Kelleher and Justin J. MacCormack . They suggest that there is a tendency to a risky behavior, Companies started to run the risk of creating unrealistic numbers for themselves and shareholder expectations, which it could confuse communications with investors and inflating managerial rewards.
This confronts us with a real and serious problem when it comes to investing in projects because later we can not generate the expected return and risk of failure in the project, the IRR can generate two different values for the same project when future cash flows switch from negative to positive (or positive to negative). In addition, since the IRR is expressed as a percentage, and This can make small projects appear more attractive than large , although large projects with lower IRR may be more attractive as NPV of smaller projects with IRR .
The management of the IRR must be just when the project generates no interim cash flows - or when those interim cash flows really can be invested in real IRR otherwise would not be realistically analyzing the viability of the project, and this is not what you want if you really are expecting to thrive in a project, The best you can do is to get real results that can assess the potential risks of the investment and the real return of the project.
Among its disadvantages we can find that requires finally are compared with an opportunity cost of capital to determine the decision on the project. That project in which the internal rate of return, we will accept it greater than the discount rate investor (relevant interest rate), the IRR criterion is not reliable to compare projects and only tells us whether a
Many companies wants to have a return on their investment in a few years and begin to evaluate their projects optimistically calculating an internal rate of real return not yielding results in the end. This does not end up being expected by the companies; According to the article the authors John C. Kelleher and Justin J. MacCormack . They suggest that there is a tendency to a risky behavior, Companies started to run the risk of creating unrealistic numbers for themselves and shareholder expectations, which it could confuse communications with investors and inflating managerial rewards.
This confronts us with a real and serious problem when it comes to investing in projects because later we can not generate the expected return and risk of failure in the project, the IRR can generate two different values for the same project when future cash flows switch from negative to positive (or positive to negative). In addition, since the IRR is expressed as a percentage, and This can make small projects appear more attractive than large , although large projects with lower IRR may be more attractive as NPV of smaller projects with IRR .
The management of the IRR must be just when the project generates no interim cash flows - or when those interim cash flows really can be invested in real IRR otherwise would not be realistically analyzing the viability of the project, and this is not what you want if you really are expecting to thrive in a project, The best you can do is to get real results that can assess the potential risks of the investment and the real return of the project.
Among its disadvantages we can find that requires finally are compared with an opportunity cost of capital to determine the decision on the project. That project in which the internal rate of return, we will accept it greater than the discount rate investor (relevant interest rate), the IRR criterion is not reliable to compare projects and only tells us whether a