What is the rate of return method?
The internal rate of return method is one dynamic investment calculation, in which the internal Rate of interest as a yardstick serves the profitability of investments. This is the interest rate that results in a net present value of zero when discounting the series of payments and payments.
graphical and computational determination
The internal rate of return can be determined graphically and mathematically. In both cases, two different interest rates are initially selected as the trial interest rate, after which the internal interest rate is determined.
The liquidation proceeds of the investment object are discounted and added to the surpluses from the investment object.
Assessment of the rate of return method
The internal rate of return method can be used to assess:
- The advantages of an individual investment object, which is given when the internal rate of return at least corresponds to the minimum rate of interest set by the company
- The advantages of alternative investment objects, whereby the investment object with the higher internal rate of return is the more advantageous.
- The optimal time to replace an old investment object with a new investment object.