W9_Hassan Albarrami_ (IRR)
- Problem Definition
In this blog I’m going to take the same case study (see W8 blog) but this time, IRR will be calculated for this project to See wither the project still a wise investment or not.
- Identify the Feasible Alternative
Either to go ahead with the project (IRR > 0), or to cancel the project (IRR< 0).
- Selection Criteria
IRR (Internal Rate of Return) is a financial indicator that assessing return on an investment or a project. It is the discount rate which makes the net present value of the cash flows from the investment equal to zero.
C : cash flow
r: internal rate of return
NPV: net present value
The table below is showing the cash flow and IRR in EXCEL ( go to this link to show how to calculate IRR http://www.youtube.com/watch?v=qAhV3xG0i8s)
Table 1. IRR calculation
- Selection of the Preferred Alternative
It is clear from the table that IRR= 44% which means I can gain 44 OMR for each 100 OMR I invest now. We can say that this project is acceptable.
- Performance Monitoring and the Post Evaluation of Result
As the IRR is showing very high it would be better to assess the project again by using another method. I will use ERR in my next blog
- Economywatch , Internal Rate of Return, Discount Rate, IRR, Retrieved on 01.08.2014 from http://www.economywatch.com/investment/internal-rate-of-return.html
- PMI-Oman 2014 , W8_Hassan Albarrami_ (NPV), Retrieved on 01.08.2014 from https://pmioman14.wordpress.com/author/sulmanhassan/
- Iinvestopedia , Internal Rate Of Return – IRR on 01.08.2014 from http://www.investopedia.com/terms/i/irr.asp