Calculate the IRR for the project

Year 0 1 2 3 4 5
Profit -1,500,000 800,000 600,000 400,000 200,000 100,000
DF 10% 0.909 0.826 0.751 0.683 0.621
PV -1,500,000 727200 495600 300400 136600 62100
NPV -1,500,000 -772,800 -277,200 23,200 159,800 221,900
Year 0 1 2 3 4 5
Profit -1,500,000 800,000 600,000 400,000 200,000 100,000
DF 20% 0.833 0.694 0.579 0.482 0.402
PV -1,500,000 666400 416400 231600 96400 40200
NPV -1,500,000 -833,600 -417,200 -185,600 -89,200 -49,000

(b-a)

(20-10)

= 18.19

What are two advantages of using IRR as an investment appraisal tool?

The IRR is the annual percentage return achieved by a project, at which the sum of the
discounted cash inflows over the life of the project is equal to the sum of the capital invested.
Advantages of IRR are:

1. The value to a business of calculating the IRR is that its decision-makers are able to see
the level of interest that a project can withstand.
2. It calculates Break-even, IRR calculates an alternative cost of capital including an
appropriate risk premium.

Would you approve the project? Explain your answer.

The IRR for the project of launching a new product is 18.19, which is considerably a low internal
rate of return. Internal rates of return are commonly used to estimate the desirability of projects.
The higher a project's internal rate of return, the more desirable it is to undertake the project. Any
project with a lower IRR represents a lower rate of return. Hence the company will not be able to
gain their invested amount with a lower rate of IRR. Therefore, this project cannot be approved.