IRR

■ Internal Rate of return of a project is the

discount rate which equates the present value
of future cash inflows with the present value of
future cash outflows . At IRR the NPV is ZERO
■
 Accept / Reject Criterion
■ Accept if r > k

■ Reject if r < k

■ May accept if r = k
■ A proposal involves a outlay of Rs. 1,60,000
and is expected to generate the cash inflows
of Rs. 40,000 , Rs. 60,000 , Rs. 50,000 , Rs.
50,000 , and Rs. 40,000. Find out the IRR

■ Average annual cash flow =

■ 40,000 + 60,000 + 50,000 + 50,000 + 40,000

---------------------------------------------------------------
5

= 48,000
 1,60,000
■ Pay back period = ------------------
48,000

= 3.33

Now search for a value nearest to 3.33 in 5

years row of PVIFA table.
The closest figures given are at 15% ( 3.352)
and at 16% ( 3.274)
 This means that the IRR of the proposal lies
between 15% and 16%

Find out the NPV of the proposal for both

these approximate rates

At 16% NPV = 1,57,750 – 1,60,000

= - 2,250

At 15% NPV = 1,61,540 – 1,60,000

= 1,540
 PV of CI (LR) - PV of CO (LR)
IRR = LR + ---------------------------------------- X Diff
PV of CI (LR) – PV of CI (HR)

1,61,540 - 1,60,000
= 15% + ------------------------------ x 1
1,61,540 - 1,57,750

= 15.4%