Question

Define Breakeven ROR value, and give an example other than the examples in the slides or textbook

Define Breakeven ROR value, and give an example other than the examples in the slides or textbook * Your answer ! This is a required question

Answer 1

Break ever ROR is also known as the internal rate of return. It is the rate of return at which the present value of net future inflow equals present value of initial outflow. It is called break-even because at this point no profit or loss is earned by the firm after considering the time value of money. People use this rate of return to judge their investment decisions. Even in companies, capital budgeting decisions are taken after considering the IRR. If the required rate of return is greater than IRR then the company accepts the project otherwise the company rejects it. For example, consider the following project. Where the cash flow of the project is given by years :

Year	Cashflow
0	-100000
1	30000
2	30000
3	30000
4	30000
5	30000

In the above project if we equate the present value of inflow with the outflow we found that IRR is 15.24 %. Thus if we discount the & 30,000 future value at 15.24% we get the present output of $100,000.