IRR and Graphs

jow774 Registered Posts: 465 Dedicated contributor ? ? ?

Im having trouble understanding IRR and how to plot it on a graph? Can anyone explain this is basic terms to me.



  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034

    I've attached a word doc which I hope will help.

    It is generally logical, the higher the borrowing rate of interest, the fewer projects that are worthwhile. E.g. the higher the mortgage rate, the fewer people can afford to take out mortgages to buy homes.

    The same applies to IRR/NPV. The higher the PV rate, the less likely a project will produce a positive NPV. In fact as the PV rate rises, the NPV falls.
    Ultimately NPV falls so much that it becomes negative.

    The point at which the PV rate gives rise to a zero NPV is the internal rate of return (IRR).

    For many candidates, drawing a diagram and explaining what it shows is easier than trying to write an explanation of IRR from scratch. When I attended a lecturers' meeting with the chief assessor Les Nightingale a couple of years ago, I asked whether an anotated diagram would be acceptable in an exam question asking for an explanation. He said it would.

    jow774, you have asked for guidance how to plot the diagram. I hope this helps. You would not need to find the precise value of the IRR, so a sketch diagram would be sufficient for both the skills test and the exam for ECR.
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  • jow774
    jow774 Registered Posts: 465 Dedicated contributor ? ? ?
    Thanks for that Sandy, you are great.


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