Internal Rate of Return and Capital Appraisal Techniques Analysis

This paper discusses the internal rate of return and the evaluation of other techniques used for capital appraisal. It also compares the IRR with other techniques and their usefulness. The objective of the company is to maximize its value through using the capital appraisal techniques. There are mainly four appraisal techniques: Payback period, Net present value, Accounting rate of return, and Internal rate of return. The net present value directly determines the contribution of the dollar to the stockholders of the company whereas the internal rate of return shows the return on the original amount of investment. The IRR method shows the conflicting results in the mutual exclusive projects whereas the NPV shows the profitability of each proposal which is more useful. The IRR method is more popular than NPV as it is simple and easy to calculate whereas the NPV method is more complex because it considers various assumptions at each stage such likelihood of receiving the cash, rate of discount and others. But for the long term project, the NPV method is better than IRR. The multiple discount rates can be handling in NPV whereas the IRR considers only single discounting rate. The IRR is mainly used to determine the efficiency of the project as it considers the time value of money which is not considered by the NPV. There is an inverse relationship between the discounting rate and NPV as higher the discounting rate than lesser the NPV. It can be stated that NPV is better for comparing the projects.