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Method to calculate IRR

Satvir Singh (Newly minted CA) (1733 Points)

09 July 2010  

Can anyone provide me formula to calculate exact IRR, i.e. after applying trail and error method, we come to know that rate is between 10% & 11%. But, what is the formula to find rate in decimal points after this.

 

Thanks in advance


 5 Replies

sarvani (student) (40 Points)
Replied 10 July 2010

let present value @ 10%-present value @ 11%=x

and present value @ 10%-initial investment =y

then formula for calculating IRR is IRR=10+(11-10)*y/x

if you provide me the question i will solve it for you.

shitanshu priyadarshi (student) (23 Points)
Replied 10 July 2010

 

IRR:- It is the rate of return or discounting factor at which discounted cash in flow is equal to discounted cash out flow i.e NPV=0, PI=1.

EXAMPLE

Let cost of project is Rs 500000.

you are required to find IRR if cash in flow of different future years are as below :-

year

cash in flow

pv factor @ 24%

pv (Rs)

pv factor @ 23%

pv (Rs)

1

200000

0.8065

161300

0.813

162600

2

80000

0.6504

52032

0.6609

52872

3

300000

0.5245

157350

0.5374

161220

4

195000

0.4229

82465.5

0.4369

85195.5

5

75000

0.3411

25582.5

0.3552

26640

6

46000

0.2751

12654.6

0.2887

13280.2

TOTAL

491384.6

501807.7

Here we find that at 24%, discounted cash in flow is less than Rs 500000

And

At 23%, discounted cash in flow is more than Rs 500000

Therefore, the rate at which discounted cash in flow becomes Rs 500000 i.e equal to out flow of cash at zero time,

lies between

24% and 23%, which is called IRR.

Therefore,

IRR = 23% + (501807.7 - 500000)/(501807.7-491384.6)*(24%-23%) = 23.1734321

=24% - (500000 - 491384.6)/(501807.7-491384.6)*(24%-23%) = 23.1734321

Therefore, IRR= 23.1734%

CA Mohit kumar jain (Searching Source of Money)   (149 Points)
Replied 16 July 2010

10+( Pv @ 10% - Pv of outflow / Pv @ 10% - Pv  @ 11%)* 11-10

Sreeram (Consultant) (97 Points)
Replied 10 August 2010

Hi friend,

 

A sample video of Online Coaching - Shortcut method to compute IRR is placed by Sreeram Coaching Point. Visit www.sreeramcoachingpoint.com and make use of it.

1 Like

Suman (CA FINAL) (214 Points)
Replied 17 August 2010

Thanks for Sharing Sreeram.

 The effort taken by LM Sir for our students' community is something marvelous.. :-)


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