Project B has a cost of $23,556 and its expected net cash flows are $6,000 p.a. for the next five years. What is the project's internal rate of return? 

 

Internal rate of return (IRR) is a discounted technique (considers time value of money). IRR is a benchmark used by the company whether to accept or reject an investment project. The higher the IRR, the better. The goal of the IRR is to zero out net present value (NPV). IRR is a relative measure and NPV is an absolute amount. NPV is more superior than IRR but, profitability index (PI) is the most superior among the three. Profitability index is equal to present value of cash inflows divided by present value of cash outflows (or just an investment). When the project is mutually-exclusive (only one project can accept by the company), PI is the benchmark that will be used in deciding whether to accept or reject an investment project. NPV, IRR and PI have direct relationship. Direct relationship means that, if NPV is acceptable, IRR and PI are acceptable too exception to the rule is when the investment project is mutually-exclusive. Just use the format above in computing NPV and PI. If you have some questions about this topic or my answer just feel free to comment in the comment box below. One last thing, the NPV in my answer, is not equal to zero due to rounding off but that little difference is okay because that amount is insignificant.

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