Internal Rate of Return Method – Global Projects

NPV gives an absolute number (₹ 5 Cr). IRR gives a percentage (15%). Management loves percentages.

1. Definition

IRR is the discount rate at which NPV = 0.

• It is the break-even interest rate.
• Decision Rule:
  • If IRR > Cost of Capital (WACC) -> Accept.
  • If IRR < Cost of Capital (WACC) -> Reject.

2. Comparison: NPV vs IRR

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3. Exam Notes: Writing the Answer

Question: "Define IRR. What is the acceptance rule?" (5 Marks)

Answering Strategy:

1. Define: "Rate at which PV of Inflows = PV of Outflows".
2. Rule: Accept if IRR > WACC.
3. Graph: Draw a downward sloping NPV curve crossing the X-axis. The crossing point is IRR.

Summary

• Popularity: CEOs ask "What is the ROI?", which essentially means IRR.
• Pitfall: For mutually exclusive projects (Project A vs B), IRR can give the wrong advice (showing small high-yield project as better than large high-profit project).

Quiz Time! 🎯

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