Under the trial and error method of calculating internal rate of return, what is the decision rule for accepting or rejecting a project?
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.
I am a businessman in the internet service industry, facing with two mutually exclusive projects. one at Fce Zaria and the other at Nuhu Bamalli Polytechnic Zaria. the initial cost is N989,000 and N542,000 respectively for five year in operation. the annual cash follow expected are as follow: year c.f(fce) c.f (nuhu) 1 97100 40000 2 97100 40000 3 97500 40000 4 97200 43000 5 96100 45000 discounting factor of 20% HELP ME IN WISELY SELECTION OF PROJECT TO BE INVESTED
If this is an investment that you expect to make money on, don't chose either one. You will lose money!
The present value of the first is -698,734. The present value of the second is -418,919. If you found the present value with a -0- discount rate the present value would still be negative.
Now if you are a utility or the project is required for some non-monetary reason, then you would chose the project with the highest present value or the second one.
What would my net present value (NPV) be from this information: We are purchasing a wireless order-taking systems and doing a cost analysis to justify acquiring it. 1. The acquisition cost is $40,000 paid at the time of installation. 2. The resulting savings will reduce wait staff by one: $12 per hour, or 2020 hours per year + 18% benefits. 3. The cost of money cost is 7%. 4. the system may become obsolete in three years. what is the Internal Rate of Return (ROI or IRR) and Net Present Value (NPV).
Using the calculators at IRR Calculator and Calculate NPV, the IRR = 50.6% and the NPV = $35,063. With the high IRR and the very positive NPV, your capital investment decision is yes! Make the investment.