Q. Explain the Procedure to Find Out IRR?
Procedure to Find Out IRR:-
- Step I : Compute the fake payback period
Fake Payback Period = Initial Cash Outflows / Average Cash Inflows
Average Cash Inflows = Total Cash Inflows during the life of the project / Number of year of life
- Step II: Locate the closest figure to false payback period in the annuity table A-2 alongside the row of number of years of the project. The charge of that column will be the first discount rate.
- Step III: Uncover the NPV of the project at the first discount rate located above. If NPV is positive decide one more discount rate which should be higher than the first discount rate thus that the second NPV may be negative. Likewise If NPV from first discount rate located above is negative determine second rate lower than the first rate therefore that second NPV may be positive. At the present there are two NPVs at two different rates one is positive and other is negative.
- Step IV: Now consider the following formula to find IRR:
NPV at lower discount rate
IRR = Lower discount rate +------ X Difference in discount rate
NPV at lower discount rate - NPV at higher discount rate