06-24-2010, 04:10 PM
IRR calculation involves the same equation that we used for the calculation of NPV.[)]
The only difference is that while calculating IRR we would set the value of NPV equal to zero and then solve the equation for the value if âiâ. In other words, the value of âiâ, at which the net present value of the project equals zero would be considered as the internal rate of return of the project.
NPV= -IO +CF1/ (1+IRR) + CF2/ (1+IRR) 2
= 0= -200,000 + 120,000/ (1+0.1) + 240,000/ (1+0.1)2
The only difference is that while calculating IRR we would set the value of NPV equal to zero and then solve the equation for the value if âiâ. In other words, the value of âiâ, at which the net present value of the project equals zero would be considered as the internal rate of return of the project.
NPV= -IO +CF1/ (1+IRR) + CF2/ (1+IRR) 2
= 0= -200,000 + 120,000/ (1+0.1) + 240,000/ (1+0.1)2