Internal Rate of Return

(IRR)

Meaning :

Internal rate of returns is that rate at which the sum of discounted cash inflow equals the sum of discounted cash outflow. In other words it is the rate which discounts the cash flow to zero.

Accept/reject criterion

The acceptance and rejection is done on the basis of the IRR rate.

Comparison of IRR with NPV

NPV IRR

a) It take interest as a known a) It take interest as a-

factor unknown factor

b) It calculates the exact b) It calculates maximum

amt. of investment rate of interest

Conflicts :

The project require different cash outlay.

The project have unequal lives. The project have different pattern of

cash flows.

Merits &demerits:

Consider the time value of money. Take the amount of expenses

&revenue. Gives more value to the present

money value.

It is very difficult. Reinvestment presumption.