Page 105 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Internal Rate of Return (IRR)

IRR =

• The rate of interest that discounts the investment cash flows to a net present value
of zero.

Example:

Project A: Project B: Assume the WACC is still
7%: Where projects are
-150 000 CFj -150 00 CFj independent both projects

85 000 CFj 35 000 CFj should be accepted as the

65000 CFj 55 000 CFj IRR exceeds the WACC ( +
NPV).
45 000 CFj 120 000 Cfj However, if projects are

2 IRR = 16.2% 2 IRR = 15.3% mutually exclusive: Select
nd
nd
the one with the higher IRR:
Show calculator inputs Project A
105