What is the difference between wacc and irr

Toggle navigation. Commonly, the IRR is used by companies to analyze and decide on capital projects. What is meaning of a bell curve in a performance appraisal? University a Fit for Me? University Will Do For You! Are You Missing a Finance Department? Departments Accounting Finance Treasury Leadership. In simple words, it is the rate of growth that a particular project is expected to make. On the other hand, WACC is the expected future cost of a fund.

These two concepts, together, help a financial analyst make a decision for a project. It is a tool which is used in financial analysis to help you calculate the attractiveness of different investments you have made. Once you calculate the IRR, you are then asked to choose from the projects you have invested on as you get to know about the ones which are profitable and others that are not.

NPV is the discounted net cash flow. NPV takes into account cost of capital which is discount rate. Discount Rate: The discount rate is a critical input to the estimation process of the present value of the risk adjusted cash flows to the project.

The discount rate to be used is the risk adjusted cost of capital to the LDIF or weighted average cost of capital of all investors, depending upon the cashflows being considered. NOTE: In this form, the minimum ratios are given only as potential indicators and do not necessarily apply to all cases; nor do they take into account the all risk factors. Clearly, their final assessment is contingent upon the overall project risk analysis.

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Note on problems that can arise with the IRR : Multiple IRRs are possible for a project whose net benefits change sign more than once over the payment stream. In this case the IRR loses its meaning. The IRR is also not the appropriate indicator for deciding between mutually exclusive projects. This is a situation in which only one of the alternatives can be chosen and once it is selected the other project is no longer possible for example, if it is a choice between two projects that would use the same site.