Investment Dec
Investment Dec
Investment Dec
IRR 28.08%
Net Present value
NPV is calculated by discounting the cash flows
at the firm’s opportunity cost of capital.
Mathematically this can be represented as:
Year A B C D PVIF@10%
Calculating in the similar way, the NPV of the four projects are:
IRR=28%
Internal Rate of Return
Pitfall1 - Lending or Borrowing?
With some cash flows (as noted below) the NPV
of the project increases s the discount rate
increases.
This is contrary to the normal relationship
between NPV and discount rates.
Discount
Rate
Internal Rate of Return
Pitfall 2 – Multiple Rates of Return
Certain cash flows can generate NPV=0 at two different
discount rates.
The following cash flow generates NPV=0 at both 25%
and 400%.
IRR=400
500
%
0 Discoun
t Rate
-500 IRR=25%
-1000
Internal Rate of Return
Pitfall 2 - No Rate of Return
The problem of ‘No IRR’