Irr

RemyRemy New MemberPosts: 7Registered
Hi all,

Apologies as I know this has been covered many times but can't quite find the answer I need.

I've been given an additional task for my ECR simulation with regards to NPV and IRR which asks to explain NPV and IRR (which I have done no problem) but it also asks to give a rough estimate as to the IRR for the project.

I have no idea how to calculate this as it was never taught in class (we was told we would only need to know the definition, not how to calculate it) so I'm a little stuck.

I've been given the total cost of the project, the NPV and the cost of capital.

Any help would be greatly appreciated as I'm ready to pull my hair out!

Thanks.

Remy

Comments

  • AmpsieAmpsie Well-Known Posts: 145Registered
    Hi Remy,

    I was also told that we would not need to calculate IRR just give a definition of what it was.

    If i were you i would speak to your tutor about it whilst you still have some hair left!!

    Ampsie
    :001_smile:
  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    Remy
    I've been given an additional task for my ECR simulation with regards to NPV and IRR which asks to explain NPV and IRR (which I have done no problem) but it also asks to give a rough estimate as to the IRR for the project.
    If you have had no problem defining IRR,
    1. was that because you understand what it is, and what it means?
      or
    2. because you have learned a definition, and reeled it off?

    If I assume you understand what IRR means, the examiner is well within his rights to expect you to be able to be able to estimate what the value is.
    I've been given the total cost of the project, the NPV and the cost of capital.

    So, do you know whether the IRR is more/less/the same as the cost of capital?

    As you can see, I'm not going to tell you the answer. Hopefully though, these questions will help you to find it yourself.
    Sandy
    [email protected]
    www.sandyhood.com
  • RemyRemy New Member Posts: 7Registered
    Ampsie,

    I emailed her today so hopefully I'll hear from her tomorrow before I have to hand it in! Either that or have to live with bald patches lol.

    Sandy,

    I think it's a bit of both to be honest. I understand that it's the discount rate used to create an NPV of zero, therefore if cost of capital is 10%, the IRR would be more, say 12%.

    I was just a tad confused with the question as I've never been asked (or shown) IRR with figures. I'm assuming as it says rough estimate I really don't need to calculate anything but show that I understand that IRR is higher than the cost of capital.

    In this example, NPV based on a cost of capital of 9% produces a positive NPV of £600 (original cost £19,000)... would an estimate of 12% for the IRR be sensible?

    Thanks again for your help.

    Remy.
  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    Remy
    Based on the information you've provided, 12% looks a good estimate
    Sandy
    Sandy
    [email protected]m
    www.sandyhood.com
  • jkcjkc Well-Known Posts: 166Registered
    irr

    hi sandy
    following on from this if npv is 10% and company requires
    Irr of 14% investment would not go ahead as Irr is higher than
    npv?
  • SandyHoodSandyHood Font Of All Knowledge Posts: 2,034Registered, Moderator
    NPV should be a value e.g. £5,600. IRR is a % e.g 12%

    If the company has a required rate of return (often called a hurdle rate) of more than 12% (say 14%), then the IRR of 12% is not enough so the project would be rejected.
    Sandy
    [email protected]
    www.sandyhood.com
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