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IRR question


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#1 bbmak

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Posted 07 May 2013 - 04:27 AM

Which of the following events would decrease the internal rate of return of a proposed asset purchase?
 
a. Decrease tax credits on the asset.
 
b. Decrease related working capital requirements.
 
c. Shorten the payback period.
 
d. Use accelerated, instead of straight-line depreciation
 
Answer: A
 
Can anyone please explain why decrease in tax credit on an asset will decrease the IRR?


#2 mrcpa

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Posted 31 May 2013 - 09:42 AM

The internal  rate of return is also computed as follows: Investment/Cash Flows  =  Present Value Factor

The higher the present value factor,  the lower the computed rate (internal rate of return). Decreasing tax credit on the asset will increase the investment. Increase in investment will increase present value factor, hence will decrease IRR.