25.5.B.2. Internal Rate of Return (IRR)

Try these first

1. 1.

   What is IRR?

   Hint

   What does NPV equal when IRR is used?

2. 2.

   When should a project be accepted based on IRR?

   Hint

   Think about the comparison with required rates.

3. 3.

   What does IRR stand for?

   Hint

   What does IRR measure in relation to investments?

4. 4.

   If the IRR of a project is less than the required rate of return, what should be the decision?

   • Accept
   • Reject

   Hint

   Reflect on the comparison rule for project acceptance.

5. 5.

   A project requires an initial investment of $5,000 and generates cash inflows of$1,200 annually for 6 years. Calculate the IRR and assess if the project is favorable if the required rate of return is 8%.

   Hint

   Use software to find the IRR accurately.

6. 6.

   Consider two projects, A with cash flows of $1,000 per year for 5 years and an initial cost of$3,500, and B with cash flows of $1,500 per year but an initial cost of$5,000. Calculate their IRRs and suggest which project is preferable.

   Hint

   Calculate NPV at different rates to determine IRR for both projects.