# Re: internatl rate of return (IRR)

[ Follow Ups ] [ Post Followup ] [ Main Message Board ] [ FAQ ]

Posted by bana on September 20, 2002 at 20:56:44:

In Reply to: Re: internatl rate of return (IRR) posted by bana on September 20, 2002 at 19:34:27:

first year : 77000-0.33(77000-27000)=60500
second year: 77000-0.33(77000-27000)=60500
third year : 35000-0.33(35000-27000)=32360

however I don't understand the equation from Khan, can you explain how does that equation work ie. 81000(1+i)^3= 60500(1+i)^2+60500(1+i)+32360? and how to deal with the residual value?
What relationship does IRR and NPV has?

I understand the 81000(1+i)^3 bit [is it from the formula fv=p(1+i)^n?], but why does that equal to 60500(1+i)^2+60500(1+i)+32360 [I mean what does this particular bit mean?]
Thank to everyone who answered this question. I'm starting to understand a bit more .

: set up an income statement for each year and your initial outlay.

: : You can not add up you cash flows and discount them back three years --> cash flow in the second year should only be discounted back 2 years.

: :
: : : A factory bought an equipment for \$81000. The equipment has an expected life of 3 yrs with zero salvage value at the end of that time. The expected returns before tax are \$77000 at the end of the first and second yrs, \$35000 at the end of the third yera. The tax rate is 33% and that is payable on returns of net depreciation calculated as \$27000 per year. I.e. after tax returns net of depreciation at the ed of first year is 77000-0.33(77000-27000). HOw to work out the internal rate of return using excel?

: : : first of all i added up the total return 77000+77000+35000=189000
: : : assuming the discount rate at 5%,
: : : the Net Present Value I got was
: : : 189000(1+0.05)^(-3) - 81000 = 82265.30612

: : : the I worked out the IRR by hand, but could not fit in the tax or the depreciation part

: : : fv=p(1+i)^n
: : : 189000=81000(1+r/100)^3
: : : 7/3=(1+r/100)^3
: : : log 7/3 = 3 log(1+r/100)
: : : 0.122658928 = log (1 +r/100)
: : : 1.326352403 = 1+ r/100
: : : 0.326352403 = r/100
: : : 32.63% =r

Name:
E-Mail:

Subject: