IRR Formula
Internal rate of rate is calculated with the help of
interpolation and therefore internal rate of return is expected to be
overstated by some margin.
L+ (Vl/Vl-Vh) (H-L)
L= Lower rate of Return
H= Higher Rate of Return
VL = Value/NPV with Lower
rate of Return
Vh= NPV at higher rate of
return
IRR Formula Example
|
NPV
|
Rate of
Return
|
|
500
|
15%
|
|
-400
|
20%
|
IRR=L+
(Vl/Vl-Vh) (H-L)
L= Lower rate of Return
H= Higher Rate of Return
VL = Value/NPV with Lower
rate of Return
Vh= NPV at higher rate of return
Put values in above
formula
= .15+ (500/500+400) (.2-.15)
= (.15) + (.55) (.05)
=17.75%
IRR Formula Example # 2
|
NPV
|
Rate of
Return
|
|
64000
|
10%
|
|
-5000
|
20%
|
IRR=L+
(Vl/Vl-Vh) (H-L)
L= Lower rate of Return
H= Higher Rate of Return
VL = Value/NPV with Lower
rate of Return
Vh= NPV at higher rate of
return
Put values in above
formula
= .1+ (64000/64000+5000)
(.2-.1)
= (.1) + (.927) (.1)
=19.27%
