Is IRR an annual return?

rentaaskme · #1 Jul 5, 2007, 08:29 AM

recited from Brigham (Intermediate Financial Management):
"if the internal rate of return exceeds the cost of funds used to finance the project, a surplus will remain after paying for the capital, and this surplus will accrue to the firm's stockholders"

Q: What is the logic behind comparation of the two?. As I knew, it is not apple to apple. Cost of funds is annual return, whilst IRR is return during the project life (maybe more than a year).

Guys,help me explain it, thx!

croketizame · Jul 16, 2007, 09:43 AM

Quote:

Originally Posted by rentaaskme

recited from Brigham (Intermediate Financial Management):
"if the internal rate of return exceeds the cost of funds used to finance the project, a surplus will remain after paying for the capital, and this surplus will accrue to the firm's stockholders"

Q: What is the logic behind comparation of the two?. As I knew, it is not apple to apple. Cost of funds is annual return, whilst IRR is return during the project life (maybe more than a year).

Guys,help me explain it, thx!

Cost of funds is what you have to pay to run a project, the internal rate of return is what you will receive from that particular project. That is why if the internal rate exceeds the cost of funds, there will be money left so the stockholders can get their part.

You can try to calculate IRR on a web in this site: IRR Calculator



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