CH10

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Unformatted text preview: CFj 100,000 CFj 100,000 CFj 5 shift Nj 15 I/YR 15 shift NPV Add back IO: + 250,000 Divide by IO: / 250,000 = You should get PI = 1.34 You PI Internal Rate of Return (IRR) Internal IRR: the return on the firm’s invested capital. IRR is simply the rate of return that the firm earns on rate its capital budgeting projects. its Internal Rate of Return (IRR) Internal Internal Rate of Return (IRR) Internal n NPV = Σ t=1 ACFt ACF (1 + k) t - IO Internal Rate of Return (IRR) Internal n NPV = Σ t=1 n IRR: IRR: Σ t=1 ACFt ACF (1 + k) t ACFt ACF t (1 + IRR) - IO = IO Internal Rate of Return (IRR) Internal n IRR: IRR: Σ ACFt ACF t = IO (1 + IRR) t=1 IRR is the rate of return that makes the PV IRR rate of the cash flows equal to the initial outlay. of equal initial This looks very similar to our Yield to This Maturity formula for bonds. In fact, YTM is the IRR of a bond. is Calculating IRR Calculating Looking again at our problem: The IRR is the discount rate that The makes the PV of the projected cash flows equal to the initial outlay. equal (250,000) 100,000 100,000 100,000 100,000 100,000 0 1 2 3 4 5 IRR with your Calculator IRR IRR is easy...
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This note was uploaded on 01/17/2014 for the course GEB 3375 taught by Professor Sweo during the Winter '08 term at University of Central Florida.

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