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by Tshiame
(Maseru)
Under the trial and error method of calculating internal rate of return, what is the decision rule for accepting or rejecting a project?
Answer:
The trial and error method for calculating IRR that you refer to is based on the fact that the IRR = The interest rate when the NPV=0.
You simply must do trial calculation of NPV at different interest rates until you find one that makes NPV=0. This is not as difficult as it sound, because you can use a simple algorithm to zero in on 0 NPV very rapidly. Most people who find IRR are not even aware of the trial and error process. Computer software can do this almost instantly.
The question of what decision rule to use is the same as for NPV. You need to find a hurdle rate or discount rate that you are happy with. If your IRR is above the hurdle rate then you accept the project.
To get a thorough understanding of this subject, consider taking the time value of money course that will soon be offered from this web site.
