INTERNAL RATE OF RETURN

Compiled to Fulfill the Duties of Marketing Management Courses

Lecturer: Prof. Dr. Isti Fadah, M.Si.

Authored By:
Redygta Meigy Maulana (190810201153)
Galuh Dewandaru Al Amanah (190810201154)
Gusti Jimmy Murhpy (190810201161)

DEPARTMENT OF MANAGEMENT
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF JEMBER
2020
Issue Background
In general, investment is an activity of placing an amount of funds during a
certain period with the hope of earning income and / or an increase in investment
value in the future. The main objective that will be achieved in investment
activities is to gain profits and improve the welfare of investors both now and in
the future. One thing that is very important for a potential investor to pay attention
to before investing in a particular company is ensuring that the investment will be
able to provide the expected rate of return or not.
To as certain whether the investment will provide the expected rate of
return, prospective investors first need to conduct a performance appraisal on the
company that will be the place for their investment activities. Because the
company's ability to increase or maximize the wealth of its shareholders, it can be
seen from whether the company is performing well or not. Thus, companies that
have good performance will be able to provide the expected rate of return for
investors.
Today a company must be able to compete with other companies so as not
to be eliminated from the competition. The increasingly rapid industrial
development will certainly have implications for competition between companies.
For this reason, as an actor of the economy, a company is required to be able to
compete with other companies and to maintain and improve its performance so
that it can survive and not be eliminated from intense competition. Therefore, a
company needs a measurement to determine the company's success in maximizing
the wealth of its shareholders, which in this case is a performance measurement.
By measuring the performance of the company, it is possible to know the actual
performance of the company, so that the company can survive and not be
eliminated in increasingly strong and fierce competition.
The objective of a public company whose shares have been traded on an
exchange is to maximize share value because the value of the shares is the wealth
of its shareholders. In a competitive business environment, companies are not
only expected to act as wealth-creating institutions, but far more than that, they
are expected to multiply their wealth. The multiplication of wealth requires big
and brilliant steps.
So far, accounting profit has always been the focus of attention in assessing
the performance of a company. Profits are the result of the wisdom taken by
management. The profitability ratio is used to measure how much profit the
company can get. The bigger the level

Problem Identification
Based on the research background that has been stated above, the problem can be
formulated as follows:
1. What is Definition of Internal Rate of Return (IRR)?
2. How is Internal Rate of Return (IRR) on An Investment Analysis?
3. How is the Internal Rate of Return (IRR) Calculation?
4. What Weaknesses of the Internal Rate of Return (IRR) Method?

Purpose
In the case of writing this paper, basically it aims at fulfilling the task of
technical economics. In addition, basically, the purpose of writing this scientific
paper is to provide a little understanding of how the concept of rate of return
analysis and what is related to the concept.
Definition of Internal Rate of Return (IRR)
Internal Rate of Return (IRR) which is an indicator of the level of efficiency
of an investment. A project / investment can be carried out if the rate of return is
greater than the rate of return when investing elsewhere.
IRR is used in determining whether an investment is implemented or not,
for this reason it is usually used as a reference that the investment made must be
higher than the Minimum acceptable rate of return or Minimum attractive rate of
return. The minimum acceptable rate of return is the minimum rate of return on an
investment that an investor dares to make.

Internal Rate of Return (IRR) on An Investment Analysis

The calculation technique with IRR is widely used in an investment
analysis, but it is relatively difficult to determine because to get the value to be
calculated requires a "trial and error" to finally obtain an interest rate that will
cause the NPV to be zero. IRR can be defined as an interest rate that will equal the
present value cash inflow with the initial investment amount of the project being
assessed.
In other words, IRR is the interest rate which will cause the NPV to be zero,
because the present value of cash inflow at that interest rate will be the same as
the initial investment. An investment project proposal will be accepted if IRR >
cost of capital and will be rejected if IRR = cost of capital then: The project is
considered accepted.
IRR is used in determining whether an investment is implemented or not,
for this reason it is usually used as a reference that the investment made must be
higher than the Minimum acceptable rate of return or the Minimum attractive rate
of return. The minimum acceptable rate of return is the minimum rate of return on
an investment that an investor dares to make.
Internal Rate of Return (IRR) Calculation
IRR shows the discount rate or the rate of return on an investment that
results in an NPV equal to zero. To calculate IRR, the following formula is used:

Cara menghitung IRR:

a. Used the “trial and error” way
  Enter the value for i repeatedly until you get NPV = 0
b. Interpolation
  1. Enter a value for i low enough for the NPV to be positive
  2. Enter a value of i high enough so that the NPV is negative
  3. Do linear interpolation
 

Weaknesses of the Internal Rate of Return (IRR) Method

1. The discount rate calculated will be the same value for each economic
year. The IRR method does not allow calculating the IRR which may be
different each year. Whereas theoretically, it is possible to have different
interest rates every year.
2. Can be obtained i that is more than one number (multiple IRR). Thus the
problem arises, namely which one we will use.
3. When a company has to choose a project that is mutually exclusive, we
may be wrong in choosing the project if we use the IRR criteria. The use
of IRR would be appropriate if Incremental IRR was used.
References :

 Newman, Donald G. Analisis Economico En Ingenieria.Mexico.McGraw-

Hill.1988.