Financial Management

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INDIA (Querist)
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29 June 2011 Hi,
AT INTERNAL RATE OF RETURN (I.R.R.), PRESSTNT VALUE (P.V.)OF CASH INFLOW IS EQUAL TO P.V. OF CASH OUTFLOW. THUS NET PRESENT VALUE (N.P.V.) IS EQUAL TO ZERO. THUS SINCE MY N.P.V. IS ZERO AT I.R.R. I AM EARNING NOTHING. THEN STILL WHY IT IS CALLED AS A RATE OF RETURN WHEN THERE IS NO RETURN AT I.R.R. AS P.V. OF ALL MY ERANINGS IS JUST EQUAL TO P.V. OF MY OUTFLOWS.
PLEASE REPLY.

CA CS CMA Sanjay Kumar Sareen

CA CS CMA Sanjay Kumar Sareen (Expert)
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01 July 2011 DEAR MR INDIA

The internal rate of return (IRR) is used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return .
IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment as you have said.
Who says you are not earning, infact you are discounting the future cash flows(future earnings)by using such rate at where future cash flows become equal to PV of Investments and such discount rate then is also called IRR.
rgds
sanjay kumar sareen

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