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Essay example - managerial accounting ,all explained above
Finance & Accounting
Pages 5 (1255 words)
Professor Internal Rate of Return December 8, 2013 Introduction The enhancement of the decision strategies includes the use of financial tools. There are several tools used in the management process (Warren, 2011). One of the tools relates to how many regular periods will the investment be recovered…
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Investments have related interest expense amounts. The same return shows the interest rate that is used to generate a resultant zero net present value. The present value is arrived at by using an interest rate in the computation. The annual or periodic cash inflow is collected. Examples of inflows of cash are: ? 260 for year 1, ? 280 for year 2, ? 250 and for year 3. The interest rate is given. The periodic or annual inflows of cash are multiplied by the present value factor (interest rate). The result of the multiplication activity is the present value amount of the periodic inflows of cash (Hilton, 2011). To computation of the rate of internal return, the present values are determined. Next, the decision maker must equate the cost of the investment as the total inflows of cash. Subtracting the two accounts, the net present value is nil (Daft, 2011). Next, the internal rate of return can be easily computed (Sollenberger, 2008). The total present value of net inflows of cash is divided by the total inflows of cash. The computation outcome is traced is plotted on the net present value table. The decision maker searches for the column where the division result falls. The interest rate is traced by looking at the period row of the net present value table. ...
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