With reference to example discussed in lesson #29 required rate of return is calculated by

using quadratic equation. Complete procedure to calculate required rate of return is given
below.

r* = 16% AND r = - 5 % are assumed values. Actual rate is calculated below with the
values given in example of lesson 29 of handouts.

Quadratic Equation

Following is the process which shows that how quadratic equation helps to determine the
value of IRR (r).

CF0 = cash outflow in zero year = Rs. 1,000

CF1 = cash inflow in first year = Rs. 100
CF2 = cash inflow in second year = Rs. 100+Rs. 1,000= Rs. 1,100

q= CF1 + {( CF1)2 - 4 CF0*CF2}0.5 and q= CF1 - {( CF1)2 - 4 CF0*CF2}0.5

2 CF0 2 CF0

q= 100 + {(100)2 - 4 (-1,000)(1,100)}0.5 and q= 100- {(100)2 - 4 (-1,000)(1,100)}0.5

2 (1,000) 2 (1,000)

q= 100 + 2,100 and q= 100- 2,100

2,000 2,000

q= 2,200 and q= - 2,000

2,000 2,000

q= 1.1 and q= - 1

As we know that q=1+i (it is assumed above)

Now value of i or r will be:

1+i= 1.1 and 1+i = - 1

i =0.1 and i =-2

Negative rate will be ignored and conclude that for this investment the internal rate of
return (r or i) equals 10 %( 0.1)