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Year 0 Year 1 - 1000 1100 Required Rate of Return. 8% NPV18 10% NPV0 (IRR) 12% - 18

The document discusses project acceptance criteria and methods for calculating internal rate of return (IRR). It states that projects should be accepted if the expected rate of return is greater than the cost of capital, and rejected otherwise. It explains that IRR is the rate at which the net present value (NPV) of a project's cash flows is equal to zero. The document provides examples of calculating IRR for projects with different cash flow patterns like perpetuity, annuity, and unequal cash flows. It demonstrates using interpolation to calculate IRR when NPV changes signs between two interest rates. Finally, it notes that while IRR is easy to understand, it may not present the full financial picture of a project like NPV can

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Raja Hamza rasg
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61 views

Year 0 Year 1 - 1000 1100 Required Rate of Return. 8% NPV18 10% NPV0 (IRR) 12% - 18

The document discusses project acceptance criteria and methods for calculating internal rate of return (IRR). It states that projects should be accepted if the expected rate of return is greater than the cost of capital, and rejected otherwise. It explains that IRR is the rate at which the net present value (NPV) of a project's cash flows is equal to zero. The document provides examples of calculating IRR for projects with different cash flow patterns like perpetuity, annuity, and unequal cash flows. It demonstrates using interpolation to calculate IRR when NPV changes signs between two interest rates. Finally, it notes that while IRR is easy to understand, it may not present the full financial picture of a project like NPV can

Uploaded by

Raja Hamza rasg
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture-3

Project Accept + means Expected rate of return is greater then cost of capital.

Reject Project – means Expected rate of return is less then cost of capital

If 0 then accept the project because expected return is required rate of return this required rate of
return is called Internal rate of return(On which NPV is negative).

Because no loss occurring at 0.

If internal rate of return is greater the expected rate of return then accept the project. Accept project

If internal rate of return is less then expected rate of return then reject the project. Reject the project

Year 0 year 1

-1000 1100

Required rate of return.

8% = NPV18

10% =NPV0 (IRR)

12% =-18

How to calculate this IRR.

Internal rate of return is the rate on which NPV Is zero.NPV zero means that Present Value of Cash
Inflows= resent value cash outlows or Formula : Present value of net cash flows/Investment

IRR calculations depend upon the followings :

Cash flows : Perpuity cash flows , annuity cash flows , Normal Unequal

Perpuity cash flows then interes rate can be calculated as Formula : Present value of net cash
flows/Investment

IRR Rate = 70,000-30000/500,000=8%

Annuity Cash Flows

Investment =Cash flows (Net) * Annuity Factor


Put values Annuity Factor=12.5%

If n=20 the find r ?

(From table check in front of year 20 then there will be given %).

Year 0 1 2 3 4 5

Cashflows -90 40 30 20 20 24

Please calculate IRR?

Pick and trial

Take 15 %

Discount Factor 1 .870 .756 .658 .572 .497

PV -90 35 23 30 11 12

NPV=+4 on 15 % increase interest then NPV will be negative

Take 20%

Factor 1 .833 .694 .579 .482 .402

NPV=-5 (Negative)

Use Interpolation Formula

IRR = LOWER RATE OF INTERES + NPVlOWER (HIGHER RATE –Lower rate)

________________

NPVLOWER-NPVHIGHER

=15%+4/4-(-5) (20-15)%

=17.22%

Pehla konsa rate pehlay ?


Dono interest rate sai positive aya

Examination Prospective : Ye nhe ana k calculate kro bal k theoretical/conceptual askta hai

Theory which is better IRR or NPV

Advantages

IRR= easy to understand

Disadvantage:

Does not present true pic

1000=100=10%

100,000=8000 =8%

Stop at 40 Minutes

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