IRR It must be bigger then the discount rate and close to it . I mean, if it's too high for the discount rate that's not good, we have to raise costs , right ?
Hi John Iyor, Thank you for your question. IRR is a way of simulating the return on investment in a project. It stands the DCF/NPV calculation on its head by asking ‘what interest rate would we need to use to get a net present value of zero from our proposed project?’ The IRR ‘rule’ is that, for a project to be viable, the IRR should be higher than the cost of capital to the organisation. So, if an organisation is funded by debt (as opposed to share equity) and the current interest rate paid to the bank is 5%, then projects must achieve an IRR higher than 5% to be viable. In general, projects offering higher IRRs are more attractive - in purely financial terms anyway - to ones offering lower IRRs but, to be approved, all should adhere to the ‘IRR rule’. Of course, in the real world, organisations sometimes have to carry out projects that do not meet this financial threshold because they need to comply with the law, or restore a battered reputation or some such non-financial imperative.
In minute 2:56 i would love to know, Why would a company would choose a project that returns less money in absolute terms? Im trying to use my logic but i dont conclude to something realistic.
for eg: you have 2 project option, in project 1 you invest $100 and earn profit $10 (10% return) , in project 2 you invest $1000 and earn profit $90 (9% return) then if go with relative term you will choose 10% one which seems more beneficial than that of 9% but in absolute terms you will gain less i.e. only $10 , instead you could have earned $90 if you haven't chosen project in relative term. (Hope i made clear)
Risk associated by the project might overcome the possible benefits that the project Might generate in the future , You can't have it in absolute Terms cause its not Real life , different projects have different associated risks , sometimes you choose the less IRR generated just because its ALO the least Risky choose , so you would almost Feel more secure about the Life time Value of your IRR !
Hi Junior Jay. Apologies for the error and thank you for pointing this out. You can find our discounted cash flow video here: ruclips.net/video/HRwK3cbkywk/видео.html - we have corrected the link in the description also!
![IRR vs. NPV - Which To Use in Real Estate [& Why]](http://i.ytimg.com/vi/hGw2J__2adU/mqdefault.jpg)
![IRR vs. NPV - Which To Use in Real Estate [& Why]](/img/tr.png)
Very easy-to-understand approach to this concept!
good information but way too fast.... like calm down sis this is accounting
😂
good concept for a video but i now have more questions, like why would an IRR less in absolute terms, some examples would be helpful.
IRR less in absolute terms? So is IRR < Absolute terms. Simple
Good video, thankyou!
Great, clear video. Thank you!
So is a low IRR good? Meaning a lower return is required to break even on investment?
Higher the better
What is the logic behind that IRR makes the NPV zero?
Did you find an answer?
Thank you very much!
IRR It must be bigger then the discount rate and close to it . I mean, if it's too high for the discount rate that's not good, we have to raise costs , right ?
Hi John Iyor,
Thank you for your question.
IRR is a way of simulating the return on investment in a project. It stands the DCF/NPV calculation on its head by asking ‘what interest rate would we need to use to get a net present value of zero from our proposed project?’ The IRR ‘rule’ is that, for a project to be viable, the IRR should be higher than the cost of capital to the organisation. So, if an organisation is funded by debt (as opposed to share equity) and the current interest rate paid to the bank is 5%, then projects must achieve an IRR higher than 5% to be viable. In general, projects offering higher IRRs are more attractive - in purely financial terms anyway - to ones offering lower IRRs but, to be approved, all should adhere to the ‘IRR rule’. Of course, in the real world, organisations sometimes have to carry out projects that do not meet this financial threshold because they need to comply with the law, or restore a battered reputation or some such non-financial imperative.
98 (BENEFITS) x 0.943(DISCOUNT FACTOR 6%) = 92.41(DISCOUNT CASH FLOW) NOT 94.42
the thing is already complicated and they are making mistakes in it. shit
In minute 2:56 i would love to know, Why would a company would choose a project that returns less money in absolute terms? Im trying to use my logic but i dont conclude to something realistic.
for eg: you have 2 project option, in project 1 you invest $100 and earn profit $10 (10% return) , in project 2 you invest $1000 and earn profit $90 (9% return) then if go with relative term you will choose 10% one which seems more beneficial than that of 9% but in absolute terms you will gain less i.e. only $10 , instead you could have earned $90 if you haven't chosen project in relative term. (Hope i made clear)
Risk associated by the project might overcome the possible benefits that the project Might generate in the future ,
You can't have it in absolute Terms cause its not Real life ,
different projects have different associated risks , sometimes you choose the less IRR generated just because its ALO the least Risky choose , so you would almost Feel more secure about the Life time Value of your IRR !
discounted cash flow video unavailable
Hi Junior Jay. Apologies for the error and thank you for pointing this out. You can find our discounted cash flow video here: ruclips.net/video/HRwK3cbkywk/видео.html - we have corrected the link in the description also!
Many thanksss
017 Hegmann Ports
THANKS
it is good
thanks
Thankkk you very much !!
Alia Vista
Hilll Oval
pls ....take ur own time to explain
..its too fast ..i can't grasping ur speed