Appendix A 229Decision Rule: If IRR is unique and IRR ≥MARR, then the investment is
attractive.
Example 15
Reconsider the thermal window data of Example 13. If the internal
rate of return measure of worth is to be used, is this an attractive invest-
ment?
First we note that the cash flow series has a single negative investment,
followed by all positive returns; therefore, it has a unique value for
IRR. For such a cash flow series it can also be shown that as i increases
PW decreases.
From example 11, we know that for i = 15%:
PW = –10000+2525(P|A,15%,3)+3840(P|A,15%,3)*
(P|F,15%,3)
PW = –10000+2525(2.2832)+3840(2.2832)*
(0.6575) = $1529.70
Because PW>0, we must increase i to decrease PW toward zero for i =
18%:
PW = –10000+2525(P|A,18%,3)+3840
(P|A,18%,3)*(P|F,18%,3)
PW = –10000+2525(2.1743)+3840(2.1743)*
(0.6086) = $571.50
Since PW>0, we must increase i to decrease PW toward zero for i = 20%:
PW = –10000+2525(P|A,20%,3)+3840
(P|A,20%,3)*(P|F,20%,3)
PW = –10000+2525(2.1065)+3840(2.1065)*
(0.5787) = –$0.01
Although we could interpolate a value of i for which PW = 0 (rather than
–0.01), for practical purposes PW = 0 at i = 20%; therefore, IRR = 20%.