24.8. Internal Rate of Return (IRR)

Try these first

1. 1.

   What does IRR stand for?

   Hint

   Think about what rate it refers to in financial terms.

2. 2.

   What is the main purpose of calculating IRR?

   Hint

   How does it help in decision-making?

3. 3.

   What is the IRR?

   • The maximum loss from a project
   • The rate at which NPV is zero
   • The total cash flow over the project's life

   Hint

   Think about what IRR signifies in the evaluation of a project.

4. 4.

   True or False: A project with IRR below the required return should be accepted.

   • True
   • False

   Hint

   Consider the acceptance criteria related to IRR.

5. 5.

   You’re analyzing two projects: Project A has cash flows of ₹4000, ₹5000, and ₹6000 for three years with an initial investment of ₹10000; Project B has cash flows of ₹7000, ₹8000 for the first two years and ₹10000 in the third year with an investment of ₹15000. Find the IRR for both projects and determine which project to pursue based on IRR.

   Hint

   Focus on determining NPV first, then find the discount rate.

6. 6.

   Explain why IRR can sometimes lead to misleading results for projects with non-conventional cash flows.

   Hint

   Think about what non-conventional cash flows imply for re-investment rates.