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Assume a company is assessing the profitability of Project X.Project X requires 0,000 in funding and is expected to generate 0,000 in after-tax cash flows the first year and grow by ,000 for each of the next four years.A more prolonged spell of settled weather may develop towards the end of September, but there remains a lot of uncertainty in the forecast.Temperatures are expected to vary around average for the time of year and, perhaps, become a touch higher than average later in the period.IRR is sometimes referred to as "economic rate of return" or "discounted cash flow rate of return." The use of "internal" refers to the omission of external factors, such as the cost of capital or inflation, from the calculation.The second method is preferable because financial modeling works best when it is transparent, detailed and easy to audit. Cloud and persistent rain arriving into western Scotland and Northern Ireland later. Chilly, with perhaps some fog patches in southeast England.
In theory, any project with an IRR greater than its cost of capital is a profitable one, and thus it is in a company’s interest to undertake such projects.
One popular use of IRR is comparing the profitability of establishing new operations with that of expanding existing ones.
For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one.
Also, recall that the IRR assumes we can constantly reinvest and receive a return of 56.77%, which is unlikely.
For this reason, we assumed incremental returns at the risk-free rate of 2%, giving us a MIRR of 33%.