How to Calculate IRR (using trial and error)
Edspira・2 minutes read
IRR is the rate of return that makes the net present value zero, calculated by discounting cash flows until reaching that point, then compared to the company's hurdle rate to make project decisions.
Insights
- IRR is the rate of return that makes the net present value of a project zero, calculated by discounting cash flows at various rates until NPV equals zero.
- Comparing the calculated IRR with the company's hurdle rate helps determine if a project should be accepted based on meeting the required rate of return.
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Recent questions
What is IRR?
IRR is the rate of return resulting in NPV zero.
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Summary
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Calculating IRR for Project Acceptance Decisions
- IRR, or internal rate of return, is the rate of return that results in a net present value (NPV) of zero for a project when used as the discount rate.
- To calculate IRR using trial and error, set up the NPV equation with cash flows discounted by different rates until NPV equals zero.
- By iteratively trying different rates, such as 9%, 9.5%, and 10%, you can determine the IRR that makes the NPV zero.
- Compare the calculated IRR with the company's hurdle rate to decide whether to accept or reject the project based on meeting the required rate of return.
