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Life Cycle Analysis
Published in Neha Gupta, Gopal Nath Tiwari, Photovoltaic Thermal Passive House System, 2022
The internal rate of return (IRR) is a widely-accepted discounted measure of investment worth and is used as an index of profitability for the appraisal of projects. The IRR is defined as the rate of interest that equates the present value of a series of cash flows to zero.
Power Purchase Agreements for Solar Electric Systems Perhaps the Most Prolific Form of Performance Contract
Published in Eric A. Woodroof, Albert Thumann, How to Finance Energy Managment Projects, 2021
Based on the assumptions listed above, the solar project P&L can be estimated over 20 years. The revenues, expenses and tax benefits are added each year in the line labeled “Cash Flow.” This represents cash flow after tax benefits. Internal rate of return (IRR) is a common financial metric used to measure the time-adjusted returns on an initial investment.
Economic Analysis and Project Planning Techniques
Published in Anil Kumar, Om Prakash, Prashant Singh Chauhan, Samsher, Energy Management, 2020
Anil Kumar, Om Prakash, Prashant Singh Chauhan, Samsher
Internal rate of return (IRR) is used for the evaluation of the amount of return which can be obtained for the investment. The IRR process displays the other possible options available in terms of return rate. The return rate which is the rate of interest for the net discounted advantages and it is equal to the net discounted costs.
Technical note: Modified simple average internal rate of return
Published in The Engineering Economist, 2022
Behnam Babaei S. A., Abdollah J. Jassbi
The concept of internal rate of return (IRR) is one of the widely used tools in measuring the financial attractiveness of investment opportunities. If IRR is used appropriately, the decision maker could make a correct decision to either accept or reject a project. When the decision maker wants to use the IRR criterion, they should be aware that IRR has some significant shortcomings which may challenge the validity of their results. The most critical IRR method drawbacks are listed below:Cash flow stream may have multiple IRRs.Even when the IRR is unique, the results may not be the same as the net present value (NPV) method.Cash flow stream may have no real-valued IRR.Ranking of competitive projects according to IRR measure may not be equal to the NPV project rankings.If the market rate is not constant, then the IRR measure cannot be used.
Internal rates of return and shareholder value creation
Published in The Engineering Economist, 2021
Academics often recommend to use net present value (NPV) to assess economic profitability of a corporate project, since the latter directly measures shareholder value creation (e.g., Berk & DeMarzo, 2014; Ross et al., 2011). However, practitioners often employ other measures in conjunction or in place of NPV, either absolute measures of worth, such as residual income, or relative measures of worth, such as rates of return (see Bromwich & Walker, 1998; O’Hanlon & Peasnell, 1998; Lindblom & Sjögren, 2009; Sandahl & Sjögren, 2003). In particular, the internal rate of return (IRR) is widely used by practitioners for assessing economic profitability of a corporate project. It is well-known that IRR suffers from many pitfalls; nevertheless, it remains the preferred relative measure of worth in practice. The reasons may be various, including the fact that it is an internal measure (it does not depend on the cost of capital) and, not least, it is regarded as the economic rate of return by the accounting community, associated with neutral accounting (see a review in Feenstra & Wang, 2000).
Double vision: Insights about the origin and interpretation of multiple IRRs
Published in The Engineering Economist, 2018
The internal rate of return (IRR) of a prospective investment has an unambiguous mathematical definition: it is the interest rate, or rates, that set the project's net present value (NPV) equal to zero. From an economic perspective, IRR ostensibly measures the economic return on an investment, and survey results suggest that many managers continue to rely on IRR to do so (e.g., Bierman 1993; Burns and Walker 1997; Graham and Harvey 2001; Ryan and Ryan 2002). However, the ability of IRR to quantify the economic return on an investment has been questioned by many scholars over the past 60 years, especially if a project has more than one IRR (e.g., Herbst 1978; Hirshleifer 1958; Jean 1968; Kaplan 1965; Longbottom and Wiper 1978; Lorie and Savage 1955; Norstrom 1972; Wilkes 1980; and, more recently, Magni 2010, 2013).