Year Net Cash
Flow
D. F at 10% NPV at
10%D.F. at 12% NPV at
12%
I II III IV V VI
1 2000 0.910 1820 0.893 1786
2 2500 0.827 2068 0.798 1995
3 3000 0.752 2256 0.712 2136
4 3000 0.684 2052 0.636 1908
5 3000 0.621 1863 0.568 1704
Initial Cost = 10059
- 10000
9529- 10000
+59 - 471
- By using the Interpolation Formula :
IRR = 10 + [(12-10 X 59
59 – (-471)
= 10 + (2 X 59 )
530
= 10 + 59
265
= 10 + 0.2 2
= 10.22
Therefore IRR = 10.22 %4.1. Therefore, in this case, the investor recovers his/her initial investment at the
discount factor of 10.22%, where benefit is equal to costs.4.2. However, if the cost of capital in the present case were to be less than
10.22%, the investor would gain and the project would be viable. For
example, if the cost of capital were 9 %, the investor would gain to the extent
of the difference between 9% and 10.22 %. The higher the difference
between cost of capital and IRR, the higher the return.4.3. Conversely, if the cost of capital is more than 10.22 % (Cost > Benefits),
then the project is not viable for the investor.4.4. There must invariably be sufficient difference between the cost of capital and
IRR. If the cost of capital is low and the IRR is high, there will obviously be
greater difference between costs and benefits, showing the positive effect of
NPV. The higher the difference the higher the net benefit. There must be
sufficient margin of safety before considering the project as worthy of
investment.