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BRILLIANT’S Capital Budgeting 433
The IRR can also be ascertained by starting from higher rate. In such case, the IRR is
B ( )100
IRR = H + (H L) = 13% + (13 12) = 12.98%
A B 5, 550 ( 100)
It should be noted that the interpolation `h Ü`mZ XoZo `mo½` h¡ {H$ BÝQ>anmoboeZ _oWS> go
method gives an approximation of the IRR. If IRR nyU©V… ewÕ Z hmoVo hþE Hw$N> g§^m{dV hmoVr h¡Ÿ& `{X Xmo
there is greater difference between the two
discount rates, the IRR will be less accurate. So {S>ñH$mCÝQ> aoQ²>g Ho$ ~rM A{YH$ A§Va h¡ Vmo IRR H$_ ewÕ
the interpolation should be made between the hmoJmŸ& Bg{bE B§Q>anmoboeZ Xmo {ZH$Q>V_ {S>ñH$mCÝQ> aoQ>,
two closest discount rates, preferably two _w»`V: Xmo H«${_H$ {S>ñH$mCÝQ> aoQ> {OZHo$ NPV nm°{O{Q>d
consecutive discount rates having positive and
a negative NPV. d ZoJo{Q>d hmo, Ho$ ~rM H$aZm Mm{hEŸ&
2. When Future Cash Inflows are Not Equal 2. O~ â`yMa H¡$e BZâbmoO ~am~a Zht hmo
If the project is expected to generate an `{X àmoOoŠQ> go AcJ-AcJ dfm] _| AcJ-AcJ
uneven cash flow in different years, the H¡$e âcmo CËnÞ H$aZo H$s Cå_rX H$s OmVr h¡ Vmo IRR H$s
calculation of IRR is somewhat complicated.
We can calculate the IRR in either of the two JUZm Hw$N> O{Q>c hmo OmVr h¡Ÿ& h_ IRR H$s JUZm Xmo _| go
ways: NPP {H$gr EH$ {d{Y Ûmam H$a gH$Vo h¢:
(i) If the cash flows are approximate, calculate (i) `{X H¡$e âbmoO AZw_m{ZV h¢ Vmo EH$ H$mën{ZH$
the average annual cash inflow to get a EÝ`yQ>r àmá H$aZo Ho$ {cE Am¡gV dm{f©H$ H¡$e BZâbmoO
fake annuity. After that, the technique H$s JUZm H$a|Ÿ& BgHo$ níMmV² D$na g_Pm`r JB©
explained as above can be applied.
VH$ZrH$ H$m Cn`moJ {H$`m Om gH$Vm h¡Ÿ&
(ii) If there is no apparent pattern of annuity (ii) `{X H¡$e âbmoO _| EÝ`yQ>r H$m H$moB© ñnï> noQ>Z© Zht h¡
in the cash flows, the weighted average of Vmo H¡$e BZâbmoO Ho$ doQ>oS> EdaoO H$m Cn`moJ H$a|Ÿ&
cash inflows can be used as follows:
Evaluation of IRR IRR H$m _yë`m§H$Z
The IRR technique is also an important B§Q>Z©c aoQ> Am°\$ [aQ>Z© _oWS>, H¡${nQ>b ~OqQ>J H$s
discounted cash flow technique to evaluate capi- EH$ _hËdnyU© VH$ZrH$ h¡& BgHo$ à_wI JwU {ZåZ{b{IV h¢…
tal expenditure proposals. The merits of the IRR
technique can be summarized as follows:
1. The IRR technique takes into account the 1. IRR _oWS> _| _Zr H$s Q>mB_ d¡ë`y H$mo Ü`mZ _| aIm
time value of money and the cash flows OmVm h¡Ÿ& AbJ-AbJ g_` na àmßV hmoZo dmbo H¡$e
occurring at different point of time are
âcmoO H$mo AbJ-AbJ \¡$ŠQ>a go ES>OñQ> {H$`m
adjusted to make them comparable.
OmVm h¡ Vm{H$ CZ_| VwbZm H$s Om gHo$&
2. It helps in selecting those proposals which 2. `h _oWS> CZ àmoOoŠQ²>g H$m M`Z H$aZo _| ghm`H$
are expected to earn more than the hmoVr h¡ {OZ_| {_{Z__ aoQ> Am°\$ [aQ>Z© go A{YH$
minimum required rate of return. Am` H$s Anojm hmoŸ&
3. Since the IRR is expressed as a percentage, 3. My§{H$ B§Q>Z©c aoQ> Am°\$ [aQ>Z© à{VeV Ho$ ê$n _| kmV
it is convenient for those who want to H$s OmVr h¡ Bg{bE {H$gr ànmoOb H$mo EZmbmBO
analyze a proposal in terms of its percen-
H$aZm AmgmZ hmoVm h¡Ÿ&
tage return.
