Corporate Fin Mgt NDLM.PDF

Visual Aid -17: Internal Rate of Return

(Solution to problem posed in Visual Aid 16)

Year Net Cash Flow D.F. at

10%

NPV at

10%

DF at 12% NPV at
12%
1 2,000 0.910 1,820 0.893 1,786
2 2,500 0.827 2,068 0.798 1,995
3 3,000 0.752 2,256 0.712 2,136
4 3,000 0.684 2,052 0.636 1,908
5 3,000 0.621 1,863 0.568 1,704
Initial Cost -- 10,059
(-) 10,000

-- 9,529
(-)10,000
(+) 59 -- (-) 471

Visual Aid -18: Interpolation Formula

Interpolation formula to determine IRR

59

IRR – 10 + (12-10) x

59 - (-471)

= 10 + 2 x 530

= 10 + 0.22

IRR = 10.22%