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![IRR can be calculated by Trial & Error Method:
(By applying different discount rates)
At 13 % discount rate:
NPV = - 240,000+[140,000/(1.13)]+[80,000/(1.13)2]+[60,000/(1.13)3]+[20,000/(1.13)4]+[20,000/(1.13)5]
= - 240,000 + 123,894 + 62,652 + 41,583 + 12,266 + 10,855
= - 240,000 + 251,250
= Rs. 11,250
At 15 % discount rate:
NPV = - 240,000+[140,000/(1.15)]+[80,000/(1.15)2]+[60,000/(1.15)3]+[20,000/(1.15)4]+[20,000/(1.15)5]
= - 240,000 + 121,739 + 60,491 + 39,450 + 11,435 + 9,944
= - 240,000 + 243,059
= Rs. 3,059
At 17 % discount rate:
NPV = - 240,000+[140,000/(1.17)]+[80,000/(1.17)2]+[60,000/(1.17)3]+[20,000/(1.17)4]+[20,000/(1.17)5]
= - 240,000 + 119,658 + 58,441 + 37,463 + 10,673 + 9,122
= - 240,000 + 235,357
= Rs. - 4643](https://image.slidesharecdn.com/irr-190928093130/75/Irr-5-2048.jpg)
![Now Applying 15.79%, We have NPV
nearer to Zero :
NPV = -240,000+[140,000/(1.1579)]+[80,000/(1.1579)2]
+[60,000/(1.1579)3]+[20,000/(1.1579)4]+[20,000/(1.1579)5]
= - 240,000 + 120,909 + 59,669 + 38,649 + 11,126 +
9,609
= - 240,000 + 239,962
NPV = Rs. 38 Nearer to Zero](https://image.slidesharecdn.com/irr-190928093130/75/Irr-7-2048.jpg)
Uploaded byJubayer Alam Shoikat
Irr
The document discusses the internal rate of return (IRR) as a discount rate used in capital budgeting to evaluate project desirability based on cash flows. It provides a case study with an initial outlay of Rs. 240,000 and various cash flows, demonstrating calculation of IRR using trial and error method and interpolation, concluding that the project is feasible since its IRR exceeds the company's required rate of return. It also differentiates between conventional and nonconventional projects in terms of cash flow structures.
In this document
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Overview of Internal Rate of Return (IRR) and introduction to leverage, including its types and business risks.
IRR is a critical discount rate used in capital budgeting that equates net present value to zero. It helps rank projects based on desirability.
Illustrates calculation of IRR using trial and error with cash flows and discount rates affecting NPV.
Describes how to use interpolation to find IRR by adjusting discount rates for near-zero NPV.
Determines if a project is feasible based on IRR exceeding the required return and discusses scenarios for mutual exclusivity.
Differentiates between conventional and nonconventional projects based on their cash flow patterns.
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- 1. Internal Rate ofReturn (IR Finding IRR is no more difficult now . .
- 2. , leverage , concept of leverage , typesof leverage , degree of leverage , cost associate with leverage , business risk & dol
- 3. What is IRR? The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. IRR is sometimes referred to as “Economic Rate of
- 4. FINDING IRR (Trial &Error Method with Interpolation Formula) A project involves an initial outlay of Rs. 240,000. The estimated net cash flows for the project are as given: The company’s required rate of return is 13 percent. Calculate the IRR for the project. Is the project feasible assuming all other factors are equal ? Years Cash Flows (Rs.) 1. 140,000 2. 80,000 3. 60,000 4. 20,000 5. 20,000
- 5. IRR can becalculated by Trial & Error Method: (By applying different discount rates) At 13 % discount rate: NPV = - 240,000+[140,000/(1.13)]+[80,000/(1.13)2]+[60,000/(1.13)3]+[20,000/(1.13)4]+[20,000/(1.13)5] = - 240,000 + 123,894 + 62,652 + 41,583 + 12,266 + 10,855 = - 240,000 + 251,250 = Rs. 11,250 At 15 % discount rate: NPV = - 240,000+[140,000/(1.15)]+[80,000/(1.15)2]+[60,000/(1.15)3]+[20,000/(1.15)4]+[20,000/(1.15)5] = - 240,000 + 121,739 + 60,491 + 39,450 + 11,435 + 9,944 = - 240,000 + 243,059 = Rs. 3,059 At 17 % discount rate: NPV = - 240,000+[140,000/(1.17)]+[80,000/(1.17)2]+[60,000/(1.17)3]+[20,000/(1.17)4]+[20,000/(1.17)5] = - 240,000 + 119,658 + 58,441 + 37,463 + 10,673 + 9,122 = - 240,000 + 235,357 = Rs. - 4643
- 6.
- 7. Now Applying 15.79%,We have NPV nearer to Zero : NPV = -240,000+[140,000/(1.1579)]+[80,000/(1.1579)2] +[60,000/(1.1579)3]+[20,000/(1.1579)4]+[20,000/(1.1579)5] = - 240,000 + 120,909 + 59,669 + 38,649 + 11,126 + 9,609 = - 240,000 + 239,962 NPV = Rs. 38 Nearer to Zero
- 8. Project Feasibility : Theproject is feasible as its Internal Rate of Return (IRR) is greater than the company’s required rate of return, assuming all other factors are equal*. *( If there are two mutually exclusive projects and both have IRR greater than the company’s required rate of return then the project with higher NPV will be preferred. In other words, other capital budgeting techniques will be employed. )
- 9. Conventional Vs NonconventionalProject Conventional: An initial outflow followed only by a series of inflows. Nonconventional: An initial outflow followed only by a series of inflows and outflows.