Internal Rate of Return in Defense Analysis. Presented at the Annual CostAnalysis Symposium (27th), held at Leesburg, VA, on 8-11 Sep 93

摘要

Discounted Cash Flow (DCF) includes the present value (PV) (or net present value(NPV)) and the internal rate of return (IRR) methods of analyzing cash flows. DCF provides insight into financial management not possible using other techniques. The NPV of the time-phased costs over the economic life of an investment project is the best single-number measure of its life-cycle cost. Internal rate of return (IRR) is rarely used in defense analysis. A minor reason is that some IRR calculation requires cash inflow or revenue as well as outflow since defense generates no revenue, there is no IRR for a single cost stream. However, a strength of IRR is in comparing project cost streams directly, a critical aspect of defense Functional Economic Analysis (FEA). IRR in this case is based on the differential between, say a baseline and alternative cost streams with investments. The technique is explained below under mutually exclusive projects and demonstrated in the appendix.