Financial Strategy Report: IRR Analysis, Techniques and Comparison

This report provides an in-depth analysis of the Internal Rate of Return (IRR) as a financial strategy tool. It begins with a calculation of IRR and demonstrates its application. The paper then explores the usefulness of capital appraisal techniques, including the payback period, net present value (NPV), and accounting rate of return. A significant portion of the report is dedicated to comparing the IRR with other techniques, highlighting their respective strengths and weaknesses, particularly in relation to NPV. The report also discusses the limitations of IRR, such as its single discounting rate, and concludes by emphasizing the importance of NPV for long-term projects and project comparison. The report uses the references to support the analysis.

Financial Strategy

Introduction
In this present paper, we will discuss the internal rate of return. The paper also describes the
evaluation of other techniques which are used for capital appraisal and the comparison between
the IRR and other techniques.
Calculation of IRR
Year 0 Year 1 Year 2 NPV
Investment -200
Net cash flow 130.91 130.91
Present value
(10%) 0.909 0.826
Net Present value
118.99
7
108.13
2
227.12
9
Investment -200
Net cash flow 130.91 130.91
Present value
(30%) 1.3 1.69
Net Present value
170.18
3
221.23
8
391.42
1
Investment -200

Net cash flow 130.91 130.91
Present value
(20%) 0.833 0.694
Net Present value
109.04
8
90.851
5 200
Thus the internal rate of return is 20%.
Usefulness of capital appraisal techniques analysis
The objective of the company is to maximize its value through using the capital appraisal
techniques. There are mainly four appraisal techniques:
1. Payback period
It is used to determine the minimum time required to complete the initial amount of the
investment within the specific period of time. It is used to accept the project, but it does not
consider risk, financing, and the time value of money (Kashyap et al., 2014).
2. Net present value
It is the most useful tool which is used to take the decision regarding the acceptance the
project proposal as it is used to measure the profitability of the project over the specific
period of time.
3. Accounting rate of return
It is the method which is used in capital budgeting, but it does not consider the time value of
money. It mainly calculates the returns on the invested capital which can be used to accept
or reject the project. If the rate of return is higher than the project is accepted and if the rate

of return is less than one then the project is rejected, or it is equal to the rate of return then it
is on investor's decision (Pasqual et al., 2013).
4. Internal rate of return
It is used to calculate the returns but it does not consider the environmental factors. It
enables to determine the break-even point of the project when the net present value of the
project is equal to zero.
Difference in IRR and other techniques
The net present value directly determines the contribution of 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 uses single discounting rate for the evaluation of every investment proposal which is
a strength as well as the limitation of the method. 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 (Goel et al., 2015). 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.

References
Goel, S. (2015). Capital Budgeting. Business Expert Press.
Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money. Asian Journal of
Management, 5(1), 106-110.
Pasqual, J., Padilla, E., & Jadotte, E. (2013). Technical note: Equivalence of different
profitability criteria with the net present value. International Journal of Production
Economics, 142(1), 205-210.