Page 112 - DBP5043

PROJECT VALUATION TECHNIQUES

Steps in IRR

Step 1
Find the present value of annual cash flow after tax on the capital costs
required by the company.

Step 2

If the present value obtained is smaller than Io, the present greater value
to be obtained. The present value of the greater will be obtained if
factored in the cost of capital is lower than the cost of capital required by
the company.

If the present value obtained is greater than Io, the smaller the present
value to be obtained. The present value of the smaller would be obtained
if factored in the cost of capital is greater than the cost of capital
required by the company.
Step 3:
Then arrange your answers over as the chart below:
IRR = d % + −

Rate of discount
෍

X % (d) XX xx
IRR xx

Y% (e) XX

Difference XXX (a) XXX (b)

** based on Example 1, calculate the IRR and PI. Then give suggestions to
which project should be invested in.