The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows. This method, sometimes called the time-adjusted rate of return method, starts with the proposal's net cash flows and works backward to estimate the proposal's expected rate of return.

Internal Rate of Return Calculation (Even Cash flows)

IRR Factor =	Investment
	Annual cash flows

If a project has a 6-year life, requires an initial investment of $174,200, and is expected to yield annual cash flows of $40,000, what is the internal rate of return?

IRR Factor =	$-------	= select : 4.355, 4.111, 4.486
	$-------

The calculated value corresponds to which percentage in the table for the present value of ordinary annuities? (Present Value of an Annuity of $1 at Compound Interest.)
Select: 10%, 12%, 9%

APPLY THE CONCEPTS: Net present value

Project A
This project requires an initial investment of $139,590. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000 and expenses associated with the project will be $45,000 for an annual net cash flow of $--------------.

Note: Enter cash flows as positive numbers.

	Cash Flows
Year 0	-$139,590
Year 1	----------
Year 2	---------
Year 3	--------
Year 4	---------

Project B
This project requires an initial investment of $129,600. The project will have a life of 4 years. Annual revenues associated with the project will be $100,000, and expenses associated with the project will be $60,000, for an annual net cash flow of $ --------------.

	Cash Flows
Year 0	-$129,600
Year 1	------------
Year 2	---------
Year 3	--------
Year 4	--------

The cost of capital for the company is 6%.

Present Value Tables
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.

Use the minus sign to indicate a negative NPV. If an amount is zero, enter"0".

Project A NPV Analysis
Year	Cash Flow	Discount Factor	Present Value
0	$139,590	1.000	$139,590
1–4	45,000	select: 3.465, 0.792, 3.24	-------------
NPV			$ ----------

Project B NPV Analysis
Year	Cash Flow	Discount Factor	Present Value
0	$129,600	1.000	$129,600
1–4	40,000	select 3.465, 0.792, 3.24	------------
NPV			$---------

Based upon net present value, which project has the more favorable profit prospects?
select Project A , Project B , Either project

APPLY THE CONCEPTS: Internal rate of return

Calculate the internal rate of return for Project A and Project B (defined previously). Enter the IRR with the percent sign (i.e. 4%).

Project A: IRR Analysis

With an initial investment of $139,590 and annual cash flows of $-----------, the internal rate of return for Project A is ------------.

Project B: IRR Analysis

With an initial investment of $129,600 and annual cash flows of $-----------, the internal rate of return for Project B is -------------.