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computation

Unlike the NPV method, calculating the value of IRR is more difficult. The procedure will depend on whether the cash flows are annuity or mixed stream.

Annuities The following steps are taken in determining IRR for an annuity:
• Determine the pay back period of the proposed investment. .
• In Table A-4 (present value of an annuity) look for the pay back period that is equal to or closest to the life of the project.
• In the year row, find two P V values or discount factor (D Fr) closest to PB period but one bigger and ‘other smaller than it.
• From the top row of the table, note interest rate (,.) corresponding to these P V values (D Fr).
• Determine actual IRR by interpolation. This can he done either directly using Equation 10.11 or indirectly by finding present values of annuity (Equation l0.12. where

PH = Pay back period
DF, = Discount factor for ‘interest rate r.
DF rt = Discount factor for lower interest rate
DF rH = Discount factor for higher interest rate.
r = Either of the two interest rates used in the formula
Alternatively, where

PVco = Present value of cash outlay
PVCFAT = Present value of cash inflows (DF , x annuity)
r = Either of the two interest rates used in the formula
r= Difference in interest  rates
MV = Difference in calculated present values of  inflows
The computations are shown in Example 10.7.
A project costs Rs 36,000 and is expected to generate cash inflows of Rs 11,200 annually for S years. Calculate the IRR of the project.

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