Scribd
Upload
426 views4 pages

IRR Calculation Example & Analysis

The document discusses calculating the internal rate of return (IRR) of a project with cash flows of -$800 in year 0, $400 in year 1, $300 in year 2, and $200 in year 3. It tries discount rates of 8% and 6% to calculate the net present value, and finds the IRR to be approximately 6.942% using the formula shown.

Uploaded by

Abdul Rashid
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
426 views4 pages

IRR Calculation Example & Analysis

The document discusses calculating the internal rate of return (IRR) of a project with cash flows of -$800 in year 0, $400 in year 1, $300 in year 2, and $200 in year 3. It tries discount rates of 8% and 6% to calculate the net present value, and finds the IRR to be approximately 6.942% using the formula shown.

Uploaded by

Abdul Rashid
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Internal Rate of Return (IRR)

(in Thousand of $)

Input
Periods 0 1
Cash Flow -800 400

2 Profit
X
3 Cost of the Proj

In our example, the total profit over three years is $(40

2 100
X
3 800
An approximate IRR is therefore calculated as:

A starting point is to try 8%

( a ) Try 8%

Periods 0 1
Cash Flow $ -800 400
Discount Factor (% ) 1.00 0.926
Formula (% ) 1.00 (1/1.08 )
Formula $ (-800X1.00 ) (400X.926 )
Present Value $ (800.00) 370.40

The NPV is negative, therefore the project fails to earn 8% and

( a ) Try 6%

Periods 0 1
Cash Flow $ -800 400
Discount Factor (% ) 1.00 0.943
Formula (% ) 1.00 (1/1.06 )
Formula $ (-800X1.00 ) (400X.943 )
Present Value $ (800.00) 377.20

The NPV is positive, therefore the project earns more than 6%

Calculation of IRR (Internal Rate of Return)

Formula
Internal Rate of Return (IRR)
=a%+{(A/A-B)X(b-a)}%
=6%+{12.2/(12.2+13.7)x(8-6)}%
=6%+0.942%
=6.942% (Approx)

Where
a a is one interest rate
b b is the other interest rate
A A is the NPV at rate a
B B is the NPV at rate b
2 3
300 200

Profit
Cost of the Project

three years is $(400+300+200-800)=$100

100
800
ted as:

2 3
300 200
0.857 0.794
(1/(1.08*1.08)
(1/(1.08*1.08*1.08)
) )
(300X.857 ) (200X.794 )
257.10 158.80 ### (NPV )

ct fails to earn 8% and the IRR must be less than 8%

2 3
300 200
0.890 0.840
(1/(1.06*1.06)
(1/(1.06*1.06*1.06)
) )
(300X.890 ) (200X.840 )
267.00 168.00 12.20 (NPV )

ct earns more than 6% and less than 8%

2+13.7)x(8-6)}%

=Lower Interest Rate


=High Interest Rate
=Positive NPV
=Negative NPV

You might also like