Important Points for IC 89 - Management Accounting Exam
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The internal rate of return on a project is the return that equates the present value of the discounted net cash flows on the project to exactly zero.
MIRR(Modified Internal Rate of Return) is the rate at which present value of terminal values equal to outflow (investment).
Projects need to be classified to determine nature, efforts required, costs involved, benefits derivable, etc. Following are the broad classification of projects for which capital budgeting techniques are applied for analysis and evaluation before taking decision for final investment: New and Expansion projects, Replacement investments, Mandatory investments, Project diversification and R&D projects.
The management is required to identify the best one out of the following capital budgeting techniques: Pay-back method, Rate of return on Original Investment method, Rate of return on Average Investment method, Discounted Cash flow method, Net present value index method, Internal Rate of return method, Modified Internal Rate of Return method.
Under the pay back method, the worthiness of the project depends on the principle that shorter the pay-back period, better is the project or more desirable is the project.
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