What is IRR?

by Srinivas P
(Hyderabad, India)

Hi,

I have a practical question to ask.We are preparing a project wherein the investment is INR 150,000,000/- The cashflows are for a period of 25 years and the IRR is 15%(approx). (This has been worked out using Excel spreadsheet) My question is how exactly do we tell the client in terms of real money, he will make if he invests the above referred amount on the project. To be more clear suppose it is assumed he invests the above amount at 15% IRR does the client get 22,500,000 per year(less taxes) for 25 years of the project life. So how do I explain to the client. Please let me know.

Thanks a lot



Comments for What is IRR?

Click here to add your own comments

Nov 12, 2010
 Project IRR
by: Dee Reavis

Tell your client that it is like depositing their money in a savings account. They can expect to get 15% interest on their money for the 25 year life of the project.

The difference is that part of their annual "dividend" will include the return of the capital invested. With a savings account they would get their invested capital back when they physically take it out and end their investment.


Calculating Internal Rate of Return here

Click here to add your own comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Business Analyst Skills.

Internal Rate of Return Question

by Madili
(Tanzania)

Why do we prefer to choose the project with the highest internal rate of return above the opportunity cost?

Comments for Internal Rate of Return Question

Click here to add your own comments

Nov 07, 2010
 irr
by: Anonymous

Consider an investment that cost $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and the required payback is 4 years. What is the payback period? What is the npv? What is the irr? Should we accept this project? why

Answer
The payback is 4 years (100,000/25,000 = 4).

Using the NPV Calculator page here, the NPV = -$2,759.

Using the IRR Calculator page here the IRR = 7.9%.

The project met the payback criteria, but did not meet the minimum attractive rate of return requirement of 9%. Therefore we reject the project.
Mar 24, 2010
 Chose the Highest Internal Rate of Return
by: Dee Reavis

Any for profit company should be looking to maximize profit. The highest internal rate of return represents the highest profit possible for that project (or choice between projects).

Click here to add your own comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Business Analyst Skills.

IRR

by Adnan
(Karachi)

I have tried hard to find a formula which can help me to solve a question. If one of my client is interested in investing 10,000 for 10 years with semi annualy re-investment option @ 10% what will be his IRR for the project.

Comments for IRR

Click here to add your own comments

Feb 13, 2010
 Annual Effective Interest Rate
by: Dee Reavis

For simple problems like this where the numbers are constant from year to year, then the IRR will equal the annual effective interest rate. The answer to this problem is 10.25%. This is the IRR as well as the annual effective interest rate.

You can see how this works if you go to Compounding Interest Calculator CIC. Put in the following numbers to get the above result: 10000, 10%, 2, and 120.

Click here to add your own comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Business Analyst Skills.

High IRR

by Abdulmutalib Ismail
(Jubail Industrial City , Saudi Arabia)

I have calculated the IRR for a project with an initial cost of 25000USD and early profit of 3 Million USD.
The IRR calculation result is 1689 %.
This is considered to be high and illogical to report.
Is there any limit to IRR %?

Comments for High IRR

Click here to add your own comments

Nov 19, 2009
 How high is the sky?
by: Dee Reavis

It is possible to have an infinite IRR. If you made an investment of $0 and got a return, then your IRR is infinite. Walking down the street and finding a dollar would give you an infinite IRR.

More realistically, you make a finite investment and get a finite return. That return can be high depending on the numbers.

When I was in high school, I bought a used TV for $15. I fixed it up a little bit and then rented it to some college girls for 3 years @ $15/month. The Internal Rate of Return Click Here was about 1200%. So yes you can have projects that have extremely high returns.

If your management does not like to see extreme numbers like you calculated, you can just report that you got an IRR of over 100% or whatever number they would be comfortable hearing

Click here to add your own comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Business Analyst Skills.