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Chapter 7

The Internal Rate of Return

7.1 Introduction

The Internal Rate of Return (IRR) is the rate of return at which the project
has an NPV of zero.

7.2 Decision Criteria

  If the IRR > cost of capital, the project should be accepted.

  If the IRR < cost of capital, the project should be rejected.

7.3 Calculation

Calculate two NPVs for the project at two different costs of capital.

NL
IRR = L + × (H – L)
NL –NH
Where L = Lower rate of interest

H = Higher rate of interest

NL = NPV at the lower rate of interest

NH = NPV at higher rate of interest

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