Internal rate of return

A healthcare organization thinking about making a capital investment is a big decision. There are various ways and methods they should go about when selecting metrics for evaluating this capital project. Relying on a combination of metrics allows for a better evaluation. The different metrics that should be utilized are net present value, internal rate of return, and payback period. The net present value considers the time value of money, as long as the projects are generating cash flow (Woodruff, 2019). The investor’s requires rate of return is used to calculate the present value of future cash flow. The internal rate of return utilizes a discounted rate that makes the present value of future cash flows equal zero (Woodruff, 2019). This method is beneficial because it compares the attractiveness of several projects. The payback period is the easiest to calculate. This method is a calculation of how long it takes to get an original investment back (Woodruff, 2019). Relying on a combination of metics has its pros and cons. It is beneficial because capital budgeting can be very complex. Only using one metric will not give the detailed information that an organization wants. Using multiple metrics also allows users to vary the tool when they have large, strategic projects (DeloitteCFOEditor, 2013). On the other hand, utilizing multiple metics can cause some issues. One issue being that each metric is different, meaning there might be a lot of time taken up. The net present value does not necessarily help with the issue of prioritizing many projects (DeloitteCFOEditor, 2013).

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