Page 86 - CFA - Day 1 & 2 Course Notes
P. 86
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.
