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Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2015 Dear experts,

Please clarify a few of my concerns on IRR.

I know IRR is the discount rate that generates a zero net present value for a series of future cash flows. I read somewhere that IRR for an investment is the percentage rate earned on each Re invested for each period it is invested.

I want to konw the reason behind discounting the future cash flows.What purpose does it serve? At IRR NPV is 0 so doesnt it imply that there is neither profit nor loss

If IRR is 15% does it mean the company is earning 15% after recovering the cost of the project (initial outflow). Also, suppose the IRR for a project is 15% (for 5 years) does it mean that 15% return will be earned by the company over a period of 5 years or in each of the 5 years individually?

An early reply would be appreciated.

Thanks

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

14 July 2015 Yes it mean that the company is earning 15% after recovering the cost of the project. It means 15% return in each year of the 5 years.
Any project which has an IRR above the prevailing rate of interest for project finance will be a profitable venture.

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