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165,000
63,120
70,800
91,080 • Enter the cash flows,
choose F2: IRR to compute
the IRR • Result is 16.13%.
Approve the project if this
is higher than the required
return
934 IRR example 1
• Calculate the IRR for
projects A and B.
Approve if the IRR >
15%. Time Project A Project B
0
250
250
1
100
100
2
100
200
3
100
0
4
100
0 • Answer:
• 21.86% for A so approve
• 11.65% for B so reject
935 IRR example 2
• A project will generate future cash flows of
$45,000 per year for 20 years. If the initial
project cost is $500,000, then what is the
IRR?
• Answer:
• If the cash flows are even, then you can
use the annuity functions on your
calculator. The IRR is the I.
• P/YR=1, N=20, PV = 500,000, PMT =
45,000, FV=0, CPT I to get 6.395%
936 IRR/NPV example 3
•
• The cash flow is 100 at time 0, 60 at
time 1 and 60 at time 2.
Calculate the NPV using the following
discount rates:
1.
2.
3.
4. 5%
10%
13.1%
15% 937 Answer to IRR/NPV example 3
• The cash flow is 100 at time 0, 60 at
time 1 and 60 at time 2.
1.
2.
3.
4. 5% gives NPV of 11.56
10% gives NPV of 4.13
13.066% gives NPV of 0.00
15% gives NPV of 2.46 • The IRR is 13.066%! (Check this by
calculating the IRR for 100, 60, 60)
938 Graphical representation 939 IRR notes
• Over the past few weeks, you’ve done
problems like
• Given a bond cash flow, find the yield
• Given the payments on a loan, find the
contract rate • In both circumstances, you are given a
cash flow and you solve for the rate
• IRR calculations are another application of
the same process
940 Advantages of IRR
• Advantages
• Knowing a return is intuitively appealing
• It is a simple way to communicate the value of a
project to someone who doesn’t know all the
estimation details
• Generally leads to the same answers as the NPV
method • Disadvantages
• There are two occasions when IRR and NPV will not
be the same:
• IRR may result in multiple answers or no answer with nonconventional cash flows
• IRR may l...
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This document was uploaded on 02/06/2014.
 Fall '14

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