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Internal Rate of Return (IRR)

Internal Rate of Return (IRR). Another Investment Decision Rule. Review: The NPV rule states to accept all projects with NPV > 0, where. * Need to solve for NPV!. Internal Rate of Return (IRR): Calculate the IRR and accept all projects with IRR “high enough”. * Need to solve for IRR!.

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Internal Rate of Return (IRR)

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  1. Internal Rate of Return (IRR) Another Investment Decision Rule

  2. Review: The NPV rule states to accept all projects with NPV > 0, where * Need to solve for NPV! Internal Rate of Return (IRR): Calculate the IRR and accept all projects with IRR “high enough”. * Need to solve for IRR!

  3. How High is “High Enough”?The IRR will be compared to…

  4. Calculating the IRR

  5. Example: Using the Iterative Method (i.e. trial and error)

  6. IRR solved on MS Excel using both the IRR function and solver

  7. Example calculated and graphed using MS Excel

  8. IRR solved on MS Excel using both the IRR function and solver

  9. Example: Chaotic Industries using MS Excel

  10. Problems with the IRR Rule

  11. Homework: Solve for the NPV and IRR for the following projects (1) For NPV, use r = 14% (2) For NPV, use r = 9% (3) For NPV, use r = 15%

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