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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 5-year life, requiring an initial investment of $209,600, and is expected to yield annual cash flows of $52,500. What is the internal rate of return? IRR Investments Factor Annual cash flows IRR Factor: This is the factor which Investment: This is the present you'll use on the table for the value of cash outflows associated Annual Cash Flows: present value of an annuity of $1 with a project. If all of the This is the amount of dollar in order to find the investment is up front at the cash flows to be percentage which corresponds to beginning of the project, the present received annually as the internal rate of return. value factor is 1.000. a result of the project. 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? %

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