INTERNAL RATE OF RETURN AS AN ENHANCEMENT OF THE DECISION-MAKING PROCESS IN THE ASPECT OF CHOOSING THE INVESTMENT PROCESS

Abstract

The functioning of the enterprise in a dynamically changing environment requires constant shaping of its effectiveness, development, investment activity. Investment activity is inscribed in every type of business. Evaluation of investment projects has to indicate the best solution from among the proposed ones. The result of investment project efficiency evaluation depends directly on the stream of net cash flows and the level of discount rate applied to its updating. The relevance and quality of investment decisions affects, among other things, the competitiveness of the entity, its market share, prospects for revenue generation. Internal Rate of Return (IRR) is the discount rate at which the net present value of an evaluated project is equal to zero. IRR shows the rate of profitability of a project, which is paid when its internal rate of return is higher than the cut-off rate, which is the lowest rate of profitability acceptable to the investor. This indicator is focused on a single project with regular capital flows, which can also be a disadvantage for some investments. With IRR it is possible to evaluate the cash flows associated with a project. IRR helps in making the right decision from the perspective of shareholders and other decision makers.