Page 272 - BA2 Integrated Workbook STUDENT 2018

Chapter 14

5.2 Constant annual cash flows

In the same way that we can speed up the NPV and payback calculations when we
have constant annual cash flows, we can also speed up the IRR calculation in the
same situation.

For annuities, the quicker method involves setting the NPV to zero and using the
cumulative present values tables to ‘work backwards’ to estimate the discount rate.

For perpetuities the following formula can be used to calculate the IRR:

Annual cash inflow
IRR = ————–—————
Initial investment

5.3 Advantages and disadvantages of IRR

Illustrations and further practice

Go over illustration 8 for IRR with annuities

Go over illustration 9 for IRR with perpetuities

Try TYU 16

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