IRR and Cash Multiples
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Explain the use of IRR and cash multiples as alternative valuation metrics, and discuss the drawbacks of those methods. In your answer, include how sensitivity analysis affects the evaluation process. Give examples.
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IRR and cash multiples as alternative valuations are examined.
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IRR, CASH MULTIPLES, AND SENSITIVITY ANALYSES
The IRR and Cash Multiple
According to Keown et al. (2002), internal rate of return (IRR) is a capital budgeting decision or technique that reflects the rate of return a project earns. Quantitatively, it is the discount rate that equates the present value of all the future net cash flows with the project's initial cash outlay. As a decision criterion, the project is accepted when computed IRR is ≥ required rate of return while the project is rejected if the IRR < required rate of return.
It could be noted from the definition and computation that IRR considers the time value of money. This is manifested by the fact the future net cash flows are discounted to the present or computed in ...
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- Bachelor of Science in Business Administration, University of the Philippines
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- Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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