Rate of Return

In project analysis the estimation of the rate of return is essential. The calculation of the rate of return is based on the principle of discounted cash flows. Discounting is the reverse of growth rate calculations shown above.
Projects usually involve a stream of costs including investments, and a stream of benefits realized subsequently. The rate of discount at which the present values of the cost and benefit streams become equal is called the internal rate of return.

In a typical project profile, the value of (Bt - Ct) is negative in the early periods but positive in later periods, (Bt - Ct) < 0 for t = 0,…..,n and (Bt - Ct) > 0 for t = m,…..,z. However, in some cases is the value of (Bt - Ct) changing sign from negative to positive more than once. In these cases will the calculation of IRR provide more than one rate of return, r, all mathematically proper solutions, and no unique or ‘best’ rate. One way to handle this is to break the project into subperiods, where (Bt - Ct) changes only once within each sub-period.