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430 Corporate Finance BRILLIANT’S

Working Note:
1. Calculation of Depreciation
56,125 – Salvage Value 3,000 = ` 53,125;
53,125
Depreciation in one year = = ` 10,625 
5
CAPITAL BUDGETING : INTERNAL RATE OF RETURN (IRR) METHOD
H¡${nQ>b ~OqQ>J: [aQ>Z© H$s B§Q>Z©b aoQ> >(IRR) ‘oWS>

Q.50. Write a short note on IRR. / IRR na g§{já {Q>ßnUr {b{IE&
OR
Discuss the drawbacks of IRR method. Also make a comparison between NPV and IRR
method. /IRR ‘oWS> H$s hm{Z¶m| H$s ì¶m»¶m H$s{OE& NPV VWm IRR ‘oWS> Ho$ ~rM VwbZm H$s{OE&

Internal Rate of Return (IRR) B§Q>Z©b aoQ> Am°\$ [aQ>Z© (IRR)
The Internal Rate of Return (IRR) method H¡$e âcmo H$s {S>ñH$mCpÝQ>¨>J go g§~§{YV EH$ Am¡a
is another important discounted cash flow _oWS> B§Q>Z©c aoQ> Am°\$ [aQ>Z© (IRR) _oWS> h¡ Omo H¡${nQ>b
technique for evaluating capital investment BÝdoñQ>_|Q> go g§~§{YV {ZU©` boZo _| ghm`H$ h¡Ÿ& Bgo
decisions. It is also known as 'marginal rate of "_m{O©Zc aoQ> Am°\$ [aQ>Z©" `m "Q>mB_ ES>OñQ>oS> aoQ>
return' or 'time adjusted rate of return'. The IRR
Am°\$ [aQ>Z©" ^r H$hm OmVm h¡Ÿ& `h _oWS> ^r ewÕ dV©_mZ
is also based on discounting technique like NPV
method. However, the basis of the discount _yë` _oWS> Ho$ g_mZ hr h¡ {H$ÝVw XmoZmo§ _oWS²>g Ho$ {S>ñH$mCpÝQ>¨J
factor is different in both cases. In NPV method, \¡$ŠQ>a H$m AmYma AbJ-AbJ h¡Ÿ& ewÕ dV©_mZ _yë`
the discount rate is predetermined which is _oWS> _| {S>ñH$mCpÝQ>¨J H$s Xa nyd© {ZYm©[aV hmoVr h¡ Omo
usually cost of capital. On the other hand, the gm_mÝ`V… H¡${nQ>b H$s H$m°ñQ> hmoVr h¡Ÿ& Xygar Amoa, B§Q>Z©c
IRR is the rate of return that a project earns. It aoQ> Am°\$ [aQ>Z© go Ame` Cg aoQ> go h¡ {Og aoQ> go
is defined as the discount rate (r) which equates àmoOoŠQ> na [aQ>Z© {_bVm h¡Ÿ& AÝ` eãXm| _|, `h {S>ñH$mCpÝQ>¨J
the aggregate present value of the net cash
inflows (CFAT) with the aggregate present H$s dh aoQ> (r) h¡ {OgHo$ AmYma na H¡$e BZâcmo Ho$ dV©_mZ
value of cash outflows of a project. In other _yë` H$m `moJ (CFAT), H¡$e AmCQ>âcmo Ho$ ~am~a hmoVm
words, it is that rate which gives a zero NPV. h¡Ÿ& Xygao eãXm| _|, `h aoQ> Oramo NPV XoVm h¡Ÿ&
In IRR technique, the future cash inflows IRR Q>opŠZH$ _|, â`yMa H¡$e BZâcmoO H$mo Bg àH$ma
are discounted in such a way that their total {S>ñH$mC§Q> {H$`m OmVm h¡ {H$ CZH$s Hw$c dV©_mZ d¡ë`y,
present value is just equal to the present value Hw$c H¡$e AmCQ>âcmoO H$s dV©_mZ d¡ë`y Ho$ ~am~a ahVr
of total cash outflows. The time schedule of h¡Ÿ& â`yMa H¡$e âcmoO Ho$ hmoZo H$m {ZYm©[aV g_` kmV
occurrence of the future cash flows is known hmoVm h¡ na§Vw {S>ñH$mC§Q> H$m aoQ> kmV Zht hmoVm h¡Ÿ& Bgo
but the rate of discount is not known. It is
ascertained by the trial and error procedure. Q´>m`b EÊS> Eaa _oWS> Ûmam kmV {H$`m OmVm h¡Ÿ& Q´>m`c
The rate of discount calculated by trial and Ed§ Eaa {d{Y go kmV H$s JB© {S>ñH$mC§Q> H$s Xa H$mo
error, where the present value of future cash "B§Q>Z©c aoQ> Am°\$ [aQ>Z©" H$hm OmVm h¡Ÿ& Ohm§ â`yMa H¡$e
flows is equal to the present value of outflows, âcmoO H$s dV©_mZ d¡ë`y, AmCQ>âcmo H$s dV©_mZ d¡ë`y Ho$
is known as the Internal Rate of Return. ~am~a hmoVr h¡&