I'm working on a project, and I have problems with the understanding of certain areas. I don't understand why the increase in interest rates increases the IRR? Could someone explain this to me?
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do you mean why they increase the required IRR? – MD-Tech Dec 08 '15 at 16:20
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yes, because I thought that the increase of the interest rate would lead up to decrease of IRR. – John Dec 08 '15 at 16:25
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When you are making an investment decision you have the choice of either investing in the investment project or investing at the risk free interest rate. When IRR is calculated it is assumed that any proceeds from the project will be reinvested at the same rate as the IRR which is one of the failings of that model. Each project has a risk associated with it that means that it must return risk dependent a premium over the risk free rate to be worthwhile completing; otherwise you'd be better off investing at the risk free rate and not taking the risk. If risk free interest rates rise and the risk of the project remains the same the required IRR increases as the required return is the risk free rate plus the risk premium for the project.
MD-Tech
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