Verified Document

Accounting What Are Some Differences Between IRR Term Paper

Related Topics:

Accounting What are some differences between IRR and PI?

Internal Rate of Return (IRR)

IRR is the method by means of which returns on investment are calculated. IRR reflects the value of money over a period of time. In short it explains returns on investments in terms of interest rates. It tells how much rise in interest rate is needed to completely remove any expectation of good returns on investment. When IRR is really high, it means your investment involves little risk. A low risk investment is always desired and you might feel like undertaking a project based on high IRR. However IRR is not always accurate and may give highly unrealistic picture. Since IRR doesn't really talk about actual returns, it is considered safer to opt for a project that gives realistic IRR instead of one that shows unbelievably high IRR. When there is no initial cash outflow, the IRR produced may actually be in thousands, showing that the project or action is completely safe and absolutely risk-free. For this reason, it is important to have some initial cash outflow involved in order to keep IRR realistic.

Profitability Index (PI)

The profitability...

A project is accepted when PI is greater than I and rejected when it is less than one. In this method, present value of cash inflow is compared with initial investment. PI is thus the ratio of the present value of cash inflows to the investment initially made in a project and is closer to NPV approach. The simplest way to find out if PI would be greater than 1 or not is by checking the present value of cash flow: A positive value of cash flow will result in PI being positive too and if the value is negative, the PI would also be negative. PI method is also more commonly known as cash/benefit ratio.
Which capital budgeting valuation method is most preferred? Why?

IRR is more popular method than Pi even though both come with their share of flaws. The main reason for its popularity is its simple calculation method which takes into account important indicators such as the cash flows and time value of money. It is considered easier and more reliable in certain situations provided some conditions are fulfilled. However it may not always be very reliable in all situations or for all types of…

Cite this Document:
Copy Bibliography Citation

Related Documents

Corporate Finance Investment Assessment Questions
Words: 2676 Length: 7 Document Type: Term Paper

28% This gives project B. An IRR of -0.028% Part C Using the above assessments each may indicate which investment may be preferred. Using the payback period project a has a payback period of 4 years, whereas project B. has a payback period of 3 years 8 months. If the fastest payback period is preferred than project B. will be chosen. The NPV which discounts the net revenues into a net present value shows

Ratio Analysis A the Price-Earnings Ratio Reflects
Words: 3219 Length: 11 Document Type: Research Paper

Ratio Analysis a) The price-earnings ratio reflects two things -- the company's earnings and the market price. By no means is there a law that says one firm's P/E ratio should be in line with either the market or the competitors. First, an explanation of the earnings. The earnings component of the P/E is past-looking. The profit margin for HRG is fairly low -- 1.7% - reflecting that its earnings are

Financial Analysis of Bestwish Limited Company Overview
Words: 4573 Length: 13 Document Type: Essay

Financial Analysis of Bestwish Limited Company Overview Bestwish Limited produces extensive range of quality products such as gift dressing, greetings cards, and plush merchandise of more than 50,000 stocks. The production of different categories of products involve between 2 and 15 processes. The company produces standardized products and custom designed products ordered from customers on contract basis. However, Bestwish Limited is facing challenges to control the costs because of varying production process,

NPV There Are a Few Conceivable Reasons
Words: 626 Length: 2 Document Type: Essay

NPV There are a few conceivable reasons why decision-making methods other than net present value have been used by practitioners. The appeal of payback period is that it is easy to understand, for example. For small businesses especially, if there is no finance professional, the concepts in net present value might be too complicated, so payback period is used for simplicity. Another technique is IRR, which is no more or less

Finance A the Projects Net
Words: 3280 Length: 12 Document Type: Research Proposal

58 (YHOO), 13.38 (NKE) and 8.15 (BA). There are many explanations for the differences between the P/E ratios of these companies. One is the expected rate of growth. Each of these companies is operates mainly in one market, and is either the dominant player or in an industry with only one other major competitor. Some of the factors that contribute to the growth rate will contribute to differences in the

Apple Investment and Financial Analysis
Words: 3620 Length: 13 Document Type: Essay

Apple Inc. Investment Analysis and Recommendations Apple Inc. is an American multinational company specializing in designing and producing mobile telecommunication devices that include iPhone, computer software and hardware, Apple TV, Apple Watch, iPod, and other electronic devices. Apple was incorporated and publicly registered in 1977. Headquartered in California, Apple is one of the most successful American companies in term of revenue with the annual revenue reaching $233.7 billion at the end

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now