sir what is the difference between internal rate of return – IRR and cost of capital Kc ??
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The primary difference between WACC and IRR is that where WACC is the expected average future costs of funds (from both debt and equity sources), IRR is an investment analysis technique used by companies to decide if a project should be undertaken.
By WACC I mean cost of capital
IRR is the Internal rate of Return ( Tone of the class was Chupa hua return)
Say you are considering investing in a project that will give you 20% return. This is the return that you would get if you invest in this project.
Kc on the other hand means the minimum rate that you require from the investment say 16%.
Interpretation: You wanted minimum 16% from the project but the project is giving you 20%. You are enjoying excess returns of 4%. i.e Chupa Hua return from the project was 20%.
IRR is the return we get from investing in particular project and also it’s intermediate cash inflow will be investing in the same rate which the project give where as the cost of capital is the rate of which a company must need to earn to satisfy the return of equity as well as debthoders. If any project generate return less than Kc the company should to get into the project bcoz if company enter that project it destroys the wealth of their investment.
Hope this add some value!