IRR IRR Function Internal Rate of Return IRR 4 5 The internal rate of return is simply the rate of return on an investment. IRR is similar to the net present value calculation. The NPV calculation finds the net present value using a predefined discount rate. IRR finds the discount rate that makes the NPV equal to zero This example involves the decision to purchase a new machine to replace an old one. Jonesco needs to purchase a new machine and has a choice of two machines that will provide the same function Machine A cost $100,000 and would provide savings of $25,000 for the next five years. Machine B cost $75,000 and would provide savings of $20,000 for the next 5 years Machine A Time 0 2 Cash flows $100.000 $25.000 $25,000 $25.000 $25.000 $25,000 Machine B Time 0 2 4 Cash flows -$75,000 $20.000 $20.000 $20.000 $20,000 $20,000 Machine A costs more than machine B but also provides higher savings than machine in the future. Both machines have total savings of $25,000 over the cost of the machine IRR analysis can be used to find out which machine will provide the highest return on investment Machine A Machine B IRR 7.9308% IRR 10.4248% Replace the numbers in the cash box of either Machine A or Machine B by the cash flow of the case study to find the IRR associated for your case study