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The IRR can be defined as the discount rate which, when applied to the cash flows of a project, produces a net present value (NPV) of nil. This discount rate can then be thought of as the forecast return for the project. If the IRR is greater than a pre-set percentage target, the project is accepted.
The IRR is essentially the discount rate where the initial cash out (the investment) is equal to the PV of the cash in. So, it is the discount rate where the NPV = 0. It is actual return on the investment (%).
The rate of interest at which the NPV of the project is zero is known as the Internal Rate of Return (IRR). In order to estimate the IRR, we calculate the NPV of the project at two different rates of interest and estimate a rate giving an NPV of zero assuming linearity.
There are four methods we can use to determine the MIRR, two using a spreadsheet package, and two manual methods – which are more relevant to the exam. This is a useful method to start with as it will allow you to familiarise yourself with the definition of MIRR.
First, the IRR approximation formula. Any two NPVs can be used in the calculation of an approximate IRR for a capital investment project. If the two points used lie either side of the IRR (ie one discount rate lower than the IRR with a positive NPV, and one higher with a negative NPV) then the process of approximation is called interpolation
19 Αυγ 2023 · For section C questions you certainly should use the IRR formula in the spreadsheet provided. You must be logged in to reply to this topic.
The IRR is essentially the discount rate where the initial cash out (the investment) is equal to the PV of the cash in. So, it is the discount rate where the NPV = 0. It is actual return on the investment (%).
