# IRR - This way we have to solve for IRR by trial and error...

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IRR :   simply the rate of return  that the firm earns on its  capital projects. Considered differently, the  IRR is the rate of return that  makes the NPV equal to  ZERO. IRR is the rate of return that  makes the PV of the cash flows  equal  to the initial outlay. This looks very similar to our  Yield to Maturity formula for  bonds…   In fact, YTM is the IRR of a bond . Looking again at our first  problem:

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The IRR is the discount rate that  makes the PV of the projected  cash flows  equal  to the initial  outlay. This is what we are  actually doing: 8,000 (PVIFA  4, IRR) + 16,000  (PVIF 5, IRR)  = \$27,400 This is what we are actually  doing: 8,000 (PVIFA  4, IRR) + 16,000  (PVIF 5, IRR)
= \$27,400

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Unformatted text preview: This way, we have to solve for IRR by trial and error. IRR is easy to find with your financial calculator. Just enter the cash flows using the CF j function as you did with the NPV problem and solve for IRR. Solution: IRR = 19.61%-27,400 CFj (Time 0) [Flash 0] 8,000 CFj (Time 1-4) [Flash 1] 4 Shift Nj [Flash 1] 16,000 CFj (Time 5) [Flash 2] Shift IRR Solution: IRR = 19.61% 14 I/YR Shift NPV Solution: NPV @ 14% = \$4,219.60 Solution: NPV @ 13% = \$5,079.93 Solution: NPV @ 15% = \$3,394.65 Solution: NPV @ 22% = -\$1,530.89...
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IRR - This way we have to solve for IRR by trial and error...

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