Internal Rate of Return (IRR) iRR is the discount rate that equates the present value of the future net cash flows from an investment project with the project's initial cash outflow ICOE CF1 CF2 CFn (1+RR)1(1+RR)2 (1+RR) 13-11
13-11 Internal Rate of Return (IRR) IRR is the discount rate that equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow. CF1 CF2 CFn (1+IRR) 1 (1+IRR) 2 (1+IRR) n ICO = + + . . . +
IRR Solution 40,000=510,000 $12,000 (1+RR)(1+RR)2 51500010000+57000 (1+|RR)3 (1+RR)4(1+RR)5 Find the interest rate RR) that causes the discounted cash flows to equal $40,000 13-12
13-12 $15,000 $10,000 $7,000 IRR Solution $10,000 $12,000 (1+IRR) 1 (1+IRR) 2 Find the interest rate (IRR) that causes the discounted cash flows to equal $40,000. + + + + $40,000 = (1+IRR) 3 (1+IRR) 4 (1+IRR) 5
IRR Solution(Try 10%) 40,000=$10,000PVF10%+$12,00(PVFo%2)+ $15000PVF0%3)+$10000(PVF 10%4) $7,000PVF10% $40,000=$10,000(909)+$12,000(826)+ $15,000(751)+$10,000(683)+ $7,000(621) $40,000=$9,090+$9,912+$11,265十 $6,830+$4,347 f $41, 444 [Rate is too low!! 13-13
13-13 IRR Solution (Try 10%) $40,000 = $10,000(PVIF10%,1 ) + $12,000(PVIF10%,2 ) + $15,000(PVIF10%,3 ) + $10,000(PVIF10%,4 ) + $ 7,000(PVIF10%,5 ) $40,000 = $10,000(.909) + $12,000(.826) + $15,000(.751) + $10,000(.683) + $ 7,000(.621) $40,000 = $9,090 + $9,912 + $11,265 + $6,830 + $4,347 = $41,444 [Rate is too low!!]
IRR Solution(Try 15%) 40,000=$10,000PVF5%+$12,00(PVFs%2)+ $15000(PVF15%3)+$10,000PVF5%4) $7,000PVF5%5 40,000=$10,000(870)+$12,000(756)+ $15,000(658)+$10,000(572)+ $7,000(497) $40,000=$8,700+$9,072+$9,870+ $5,720+$3,479 # $36, 841 [Rate is too high!!) 13-14
13-14 IRR Solution (Try 15%) $40,000 = $10,000(PVIF15%,1 ) + $12,000(PVIF15%,2 ) + $15,000(PVIF15%,3 ) + $10,000(PVIF15%,4 ) + $ 7,000(PVIF15%,5 ) $40,000 = $10,000(.870) + $12,000(.756) + $15,000(.658) + $10,000(.572) + $ 7,000(.497) $40,000 = $8,700 + $9,072 + $9,870 + $5,720 + $3,479 = $36,841 [Rate is too high!!]
IRR Solution(Interpolate) 10$41,44 X 1,444 05 IRR$40,000 4603 15$36,841 X 05 4,603 13-15
13-15 .10 $41,444 .05 IRR $40,000 $4,603 .15 $36,841 X $1,444 .05 $4,603 IRR Solution (Interpolate) X $1,444 =