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Chapter 10

The Internal Rate of Return

The Internal Rate of Return (IRR) is the rate of return at which the
project has an NPV of zero.

 If the IRR is greater than the cost of capital, the project should be
accepted.

 If the IRR is less than the cost of capital, the project should be
rejected.

Calculate two NPVs for the project at two different costs of capital.

NL
IRR = L + × (H – L)
NL – NH

Where L = Lower rate of interest

H = Higher rate of interest
NL = NPV at the lower rate of interest

NH = NPV at higher rate of interest

Illustrations and further practice

Now try example 5 ‘Mickey Ltd (Continued)’ from Chapter 10.

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