Video: Internal Rate of Return - Closer Look

In this lesson, delve into the ins and outs of the Internal Rate of Return (IRR) as Nick Palazzolo, CPA, unpacks this fundamental concept in the world of finance. Discover the subtleties of IRR, including its definition as the discount rate that brings the net present value to zero, and what that means for making investment decisions. With a blend of practical examples and relatable analogies, Nick illustrates the nuances between net present value and the percentage-based IRR, and how they serve as tools for different decision-making scenarios. Engage in a detailed discussion on when to opt for IRR over other valuation methods, and follow Nick as he walks through an example comparing projects to determine the most advantageous based on their IRR and net present value, all while keeping in mind the concept of mutually exclusive projects versus independent ones.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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That was a lot about net present value. And now we're talking a lot about the internal rate of return. We have mentioned it, we've talked about it, we have enjoyed it. Now let's get a little bit more into it. And a lot of what you'll see on the screen here, these are just as we talked about net present value.

These are facts and truths about the internal rate of return. That sure, definitely memorize them because these are pulled from multiple choice questions where these are the right answers, but also they should make sense. These are just kind of things to memorize. But yes, these here are items that should make sense and you should definitely know. So the internal rate of return is also known as the cost is also known as outflows divided by inflows.

And we'll talk more about this, but I like to simplify it for you. It's just outflows and inflows always is, always was, and always will be. Now, this is the most important alternative to net present value. And let's talk about this for a second because there are plenty of decision making techniques. We're in the valuation methods and models, right?

This is where you might see make and buy, or should you make something or buy something, should you accept a special project. And those questions will also be sprinkled through other lessons depending on the importance and relevance there. But should we accept a project? Well, net present value is a dollar amount, right? It's an inflow minus outflow.

On the other hand, this is a percent. This is a percentage. So different reasons why you would want to use one decision model versus the other. Just like you might say, do I want to get up and go meet

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