Part Four Internal Rate of Return Method 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. Let's look at an example of internal rate of return calculation with even cash flows. A company has a project with a 6-year life, requiring an initial investment of $251,200, and is expected to yield annual cash flows of56,000, what is the internal rate of return? IRR Investmentb Factor Annual cash flows IRR Factor: This is the factor Investment: This is the which youll use on the table for present value of cash outfilows the present value of an annuity assoclated with a project. If all of $1 dollar in order to find the of the investment is up front at percentage which corresponds to the beginning of the project, the the internal rate of return CAnnual Cash Flows: This is the amount of cash flows to be received annually as a result of the project. present value factor is 1.000 Calculation Steps Present Value of an Annuity of $1 at Compound Interest. IRR Factor rounded to 6 decimals The calculated factor corresponds to which percentage in the present value of ordinary annuity table