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Corporate Finance, 5th Edition
book

Corporate Finance, 5th Edition

by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
December 2017
Intermediate to advanced content levelIntermediate to advanced
1024 pages
32h 22m
English
Wiley
Content preview from Corporate Finance, 5th Edition

Chapter 17 The internal rate of return

A whimsical “nugget”

If net present value (NPV) is inversely proportional to the discounting rate, then there must exist a discounting rate that makes NPV equal to zero.

To apply this concept to capital expenditure, simply replace “yield to maturity” by “IRR”, as the two terms mean the same thing. It is just that one is applied to financial securities (yield to maturity) and the other to capital expenditure (IRR).

Section 17.1 How is internal rate of return determined?

To calculate IRR, make r the unknown and simply use the NPV formula again. The rate r is determined as follows:

numbered Display Equation

To use the same example from Section 16.4:

numbered Display Equation

In other words, an investment’s internal rate of return is the rate at which its market value is equal to the present value of the investment’s future cash flows.

It is possible to use trial-and-error to determine IRR. This will result in an interest rate that gives a negative net present value and another that gives a positive net present value. These negative and positive values constitute a range of values which can be narrowed until the yield to maturity is found; in this case ...

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Publisher Resources

ISBN: 9781119424482Purchase book