Internal Rate of Return (IRR) for Independent Project
Company may have some projects to make decision invest or not. The independent project is one whose acceptance or rejection is independent of the acceptance or rejection of the other projects.
Internal rate of return (IRR) is the discount rate that makes Net Present Value (NPV) of investment zero.
NPV =sum of present value of each cash inflow – initial investment when NPV=0, so sum of present value of each cash inflow =initial investment
To determine IRR, we can use the following way:
IRR= r1 + [(r2-r1)/(NPVr1-NPVr2)] x NPVr1, so normally discount rate 2( r2) > discount rate 1 (r1)
Project Decision:
– If independent project IRR>cost of capital => accept the project
– If independent project IRR<cost of capital => Reject the project
Source:
- Phnom Penh HR
- Mcgraw-Hill – Fundamentals Of Corporate Finance