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In other words
it takes into consideration-
TIME VALUE OF MONEY
& OPPORTUNITY COST
IRR
How much we get by investing
Rs.100/-, Say at 10% -
Rs. 100 will be Rs. 110 after I YR
Rs. 100 will be Rs. 121 after II YR
Rs. 100 will be Rs. 133 after III YR
And so on
IRR
Rs.100 IN HAND NOW IS HAVING
MORE WORTH THAN Rs.100, THAT
IS AVAILABLE AFTER ONE YEAR
PROJECT A, AS RESIDUAL
NPV IS MORE.
WHAT IS IRR
of the Project?
TAKE EXAMPLE OF PROJECT A
IRR
YEAR Net at NPV at NPV at NPV
Income 15% 20% 25%
1 300 .870 261 .833 250 .800 240
RESIDUAL NPV AT 15% & 20% IS +VE. IT IS -VE AT 25%. SO, IRR LAY BETWEEN 20 TO 25%
TO FIND THE EXACT IRR WE USE THE
FOLLOWING ARITHMETIC FORMULA
Residual NPV
at Lower
Difference Discount Rate
Lower
IRR = Discount Rate + Between the
Two rates
X
*Sum of Residual
NPVs at Lower &
Higher Discount Rates
=21%
IRR SHOULD BE MORE
THAN LENDING RATE