Internal Rate of Return

1. Calculate Internal Rate of Return

Initial Outlay Rs.50,000

Life of the Assets 5 years

Estimated Annual Cash flow Rs.12,500

2. Calculate Internal Rate of Return

Initial Investment Rs.60,000

Life of the Asset 4 Years

Estimated Net Annual Cash Flows

First Year Rs.15,000

Second Year Rs.20,000

Third Year Rs.30,000

Fourth Year Rs.20,000

3. Royal Ltd. is considering two mutually exclusive projects. Both require an

initial cash outlay of Rs.100, 000 each and have a life of five years. The company
pays tax at 50%. The projects will be depreciated on a straight line basis. The
profit before depreciation and Tax expected to be generated by the projects are as
follow:

Year 1 2 3 4 5
Project I Rs.40,000 Rs.40,000 Rs.40,000 Rs.40,000 Rs.40,000
Project II Rs.60,000 Rs.30,000 Rs.20,000 Rs.50,000 Rs.50,000

Which one is suitable under IRR method.

4.From the following information, calculate IRR of the two project and suggest which of
the two projects should be accepted.

Particulars Project X Project Y

Initial Investment Rs.20,000 Rs.30,000
Estimated Life 5 Years 5 Years
Scrap Value Nil Nil
The profits before depreciation and after taxation (cash flows) are as follows:

Projects Year 1 Year 2 Year 3 Year 4 Year 5

X 5,000 10,000 10,000 3,000 2,000
Y 20,000 10,000 5,000 3,000 2,000