Important Questions Internal Rate of Return
Question 1: A project costs Rs. 20,000 and is expected to generate cash inflows of Rs. 9,000, Rs. 8,000, and Rs. 7,000 at the end of each year for the next 3 years. Calculate the IRR of the project using the trial and error method.
• Solution
1.To calculate the Internal Rate of Return (IRR) using the trial and error method, we will follow these steps:
2.Make an initial guess of the IRR.
3.Calculate the Net Present Value (NPV) of the project using that guessed IRR.
4.Adjust the IRR based on whether the NPV is positive or negative.
5.Repeat the process until the NPV is close to zero.