Page 359 - F2 - MA Integrated Workbook STUDENT 2018-19

Capital budgeting

6.3 IRR with 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 work out the discount rate.

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

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

Illustrations and further practice

Now try TYU questions 13 and 14 from Chapter 14

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