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Understanding of a Rate of Return Analysis using an IRR  

김진욱 (창원대학교 산업시스템공학과)
이현주 (신성이엔지㈜)
차동수 (㈜로템)
Publication Information
Journal of Korean Society of Industrial and Systems Engineering / v.25, no.5, 2002 , pp. 9-14 More about this Journal
Abstract
A capital investment problem is essentially one of determining whether the anticipated cash inflows from a proposed project are sufficiently attractive to invest funds in the project. The net present value(NPV) criterion and internal rate of return(IRR) criterion are widely used as means of making investment decisions. A positive NPV means the equivalent worth of the inflows is greater than the equivalent worth of outflows, so, the project makes profit. Business people are familiar with rates of return because they all borrow money to finance ventures, even if the money they borrow is their own. Thus they are apt to use the IRR in preference to the NPV. The IRR can be defined as the discount rate that causes the net present value of a cash flow to equal zero. Why the project are accepted if the project's IRR is greater than the investor's minimum attractive rate of return\ulcorner Against the NPV, the definition cannot distinctly explain the concept of the IRR as decision criterion. We present a new definition of the IRR as the ratio of profit on the invested capital.
Keywords
Discounted Cash Flows Method; Net Present Value; Internal Rate of Return; Minimum Attractive Rate of Return;
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