Interest rate of return

The fractional interest rate of return based on the net annual profit after tax and the original investment is... 

Equation (9-54) may be solved for i either graphically or by an iterative trial-and-error procedure. The value of i given by Eq. (9-54) is known as the discounted-cash-flow rate of return (DCFRR). It is also known as the profitability index, true rate of return, investor s rate of return, and interest rate of return. 

Cost of Capital The value of the interest rate of return used in calculating the net present value (NPV) of a project is usually referred to as the cost of capital. It is not a constant value since it depends on the financial structure of the company, the policy of the company toward a particular project, the local method of assessing taxation, and, in some cases, the measure of risk associated with the particular projec t. The last-named fac tor is best dealt with by calculating the entrepreneurs risk allowance inherent in the project i from Eq. (9-108), written in the form... 

Other names for DCFRR are interest rate of return and internal rate of return. 

Discounted cashflow rate of return (DCFRR). This method is called the investors return on investment, internal rate of return, profitability index, interest rate of return, or discounted cashflow. A trial-and-error solution is necessary to calculate the average rate of interest earned on the company s outstanding investment in the project. It can also be considered the maximum interest rate at which funds could be borrowed for investment in the project, with the project breaking even at the end of its expected life. 

A) The case where the company demands a 20 percent continuous nominal interest rate of return after taxes on any investment [i.e., profitability index (r) is 20 percent]. 

DCFROR can also be compared directly with interest rates. Because of this, it is sometimes known as the interest rate of return or internal rate of return (IRR). 

Other similar methods or names are Profitability Index, Interest Rate of Return, True Rate of Return, Investor s Rate of Return... 

Ir = Interest rate of return (fraction/year) t = Time (y)... 

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