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Found in: Page 1464

Horngren'S Financial And Managerial Accounting

Book edition 6th
Author(s) Tracie L. Miller-Nobles, Brenda L. Mattison
Pages 992 pages
ISBN 9780134486833

How is IRR calculated with equal net cash inflows?

By subtracting the anticipated future cash flows from the initial beginning value, dividing the result by the actual value, and multiplying the result by 100, one can determine the internal rate of return.

See the step by step solution

Step 1: example

Imagine that an investor requires $10,00,000 to fund a project that will provide$305,450 in cash flow annually for five years. The IRR is the rate at which those future cash flows can be valued at \$10,00,000.

Step 2: calculation

Initial investment = PV of net cash inflows

Initial investment = Amount of each cash inflow * Annuity PV factor (i = ?, n =5)

Annuity PV factor = Initial investment / Amount of each cash inflow

= 10,00,000 / 305450

= 3.27

Comparing present value chart here i = 16% that is IRR.