Page 86 - CFA - Day 1 & 2 Course Notes
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LOS 7.a: Calculate and interpret the
 net present value (NPV) and the                                   Session Unit 2: Discounted Cash Flow Applications
 internal rate of return (IRR) of an investment.




    Example: Computing IRR

    What is the IRR for the investment described in the preceding example?




    Answer: Substituting the investment’s cash flows into the previous IRR equation results in
    the following equation:










  Solving this equation yields an IRR = 15.52%.
  It is possible to solve IRR problems through a trial-and-error process. That is, keep

  guessing IRRs until you get the one that provides an NPV equal to zero. Practically

  speaking, a financial calculator or an electronic spreadsheet can and should be employed.
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