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The External Rate of Return Method

The External Rate of Return (ERR) method directly takes into account the interest rate external to a project at which net cash flows can be reinvested or borrowed. It involves three steps: 1) discounting net cash outflows to the present, 2) compounding net cash inflows to the end period, and 3) determining the ERR. If the ERR equals the minimum acceptable rate of return (MARR), the project is economically justified.

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18K views5 pages

The External Rate of Return Method

The External Rate of Return (ERR) method directly takes into account the interest rate external to a project at which net cash flows can be reinvested or borrowed. It involves three steps: 1) discounting net cash outflows to the present, 2) compounding net cash inflows to the end period, and 3) determining the ERR. If the ERR equals the minimum acceptable rate of return (MARR), the project is economically justified.

Uploaded by

Ellen Kay Cacatian
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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The External Rate of Return Method

Rodelas, Jessa Marie M. MSE40

External Rate of Return Method


ERR method directly takes into account the interest rate ( ) external to a project at which net cash flows generated or required by the project over its life can be reinvested or borrowed. If ERR=IRR, then the ERR method produces results identical to those IRR method. If ERR MARR, the project is economically justified.

Three steps in calculating ERR


1. All net cash outflows are discounted to time zero (the present) at % per compounding series. 2. All net cash inflows are compounded to period N at %. 3. Determine ERR.

Formula in getting ERR

Graphical Interpretation

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