Find Job or Recruit Staff: 093 682 682 | 078 868 848 | info@pp-hr.com | Recruitment Service

Internal Rate of Return (IRR) for Financing Project

Internal Rate of Return (IRR) for Financing Project

Internal rate of return (IRR) is the discount rate that makes Net Present Value (NPV) of investment zero.

NPV= Cash receipt – sum of present value of each cash outflow when NPV= 0, so Cash receipt = sum of present value of each cash outflow

Investing project has only one IRR.

Project Decision:

      – if IRR<discount rate => accept the project

      – if IRR>discount rate => Reject the project

Example:

Your friend lends you $100, but you return back $130 to him next year.

Dates: 0 1
Cash Flow $100 -$130

Required:

  1. Assume that interest rate at bank is 15%. Do you accept this offer?
  2. Build NPV profile/graph, and mention about financing project from your friend.

Solution:

  1. Accept or Reject this offer

NPV=100-130/(1+r)^1
NPV=0, IRR = 30%

Decision:

IRR=30%

Discount rate = 15%

30%>15%, so reject this offer from him.

  1. Graph/profile

Financing project has a cash inflow at date 0 followed by a cash outflow at date 1.The NPV is negative when the discount rate is below 30 percent and otherwise.

When discount rate is less than 30%, we will reject this offer, so we should borrow bank instead.

When discount rate (borrowing rate) is greater than 30%, so we will borrow him.

Source:

  1. Phnom Penh HR
  2. Mcgraw-Hill – Fundamentals Of Corporate Finance

Leave your thoughts

Find Jobs Here !

Phnom Penh HR Service

1. Recruitment Service
2. Cambodia Tax Consulting
3. Accounting Service & System
4. Outsourcing Service
5. Internal Auditing Service
6. HR Consulting
7. Practical Job Training
Services by ACCA | CPA,Tax Agent
Diploma in Cambodia Tax,and MBA
**Contact Us Via 093 682 682
078 868 848| info@pp-hr.com
SHARE