ROYAL UNIVERSITY OF DHAKA

House No# 2, Road No#10, Block # E, Banani, Dhaka -1213

Exam & Department Name

Bachelor of Business Administration

Course Code
FIN 233

Course Title
Introduction to Finance (Bhairab)

Spring Final Assignment

Submitted to Submitted By
Sakib Hasan Madhobi Chakraborty
E-mail: sakib.hasan@royal.edu.bd ID: 0452310004081018
Program: BBA (Day)
Batch no. 58
Semester: Spring 2023
Contact Number: 01779585843
 Assignment Topic
Set A: What is the internal rate of return (IRR) on an investment?How is it
determined? What are the acceptance criteria for IRR? Which one is superior NPV
or IRR? Why?

Solution:

The internal rate of return (IRR) on an investment is the rate of return that makes
the net present value (NPV) of the investment equal to zero. In other words, it is
the discount rate at which the present value of all future cash flows from the
investment equals the initial investment cost.
To calculate the IRR, you need to know the initial investment amount, the
expected cash flows from the investment (including both inflows and outflows),
and the timing of those cash flows. Then, you can use a formula or a financial
calculator to solve for the discount rate that makes the NPV of the cash flows
equal to zero.
The IRR is often used as a measure of the profitability of an investment, and is
typically compared to a minimum acceptable rate of return (MARR) or a required
rate of return (RRR) to determine whether the investment is worthwhile. If the IRR
is greater than the MARR or RRR, the investment is considered profitable.
One advantage of using the IRR to evaluate investment opportunities is that it
takes into account the timing and amount of cash flows over the entire life of the
investment, rather than just focusing on the initial cost or annual returns.
However, there are some limitations to the IRR, such as potential multiple rates of
return for complex projects or investments with irregular cash flows.

The internal rate of return (IRR) on an investment can be determined using a

formula or a financial calculator.
The formula to calculate IRR is based on the present value of all cash flows from
the investment, and is solved for the discount rate (r) that makes the net present
value (NPV) of those cash flows equal to zero:
NPV = 0 = -Initial Investment + (Cash Flow1 / (1+r)^1) + (Cash Flow2 / (1+r)^2) + ... +
(Cash Flown / (1+r)^n)
Where:
● Initial Investment = the amount of money invested at the beginning of the
investment
 ● Cash Flow1 to n = the expected cash flows from the investment in each year
(or period) n
● r = the IRR or the discount rate that makes NPV equal to zero
To solve for r in the IRR formula, you can use trial and error, or use the IRR
function in a spreadsheet program like Microsoft Excel.
Alternatively, you can use a financial calculator to find the IRR. Most financial
calculators have an IRR function that allows you to enter the initial investment
amount and the cash flows from the investment, and the calculator will
automatically solve for the IRR.
Once you have determined the IRR, you can compare it to a minimum acceptable
rate of return (MARR) or a required rate of return (RRR) to determine whether the
investment is worthwhile. If the IRR is greater than the MARR or RRR, the
investment is considered profitable.

The acceptance criteria for internal rate of return (IRR) depend on the specific
investment and the organization or individual making the investment decision.
However, in general, the IRR is compared to a minimum acceptable rate of return
(MARR) or a required rate of return (RRR) to determine whether the investment is
worthwhile.
If the IRR is greater than the MARR or RRR, the investment is considered profitable
and may be accepted. If the IRR is less than the MARR or RRR, the investment is
not considered profitable and may be rejected. If the IRR is equal to the MARR or
RRR, the decision may be based on other factors, such as the risks and
uncertainties associated with the investment.
The MARR or RRR is typically based on the cost of capital or the opportunity cost
of funds, which is the rate of return that could be earned by investing in a
comparable investment with similar risk. The MARR or RRR may also be based on
the organization's or individual's investment goals, such as maximizing profits,
achieving a certain level of growth, or balancing risk and return.
In addition to comparing the IRR to the MARR or RRR, other factors may also be
considered in the investment decision, such as the payback period, the net present
value (NPV), the risk and uncertainty of the investment, and the availability of
funds and resources.
Both net present value (NPV) and internal rate of return (IRR) are widely used
methods for evaluating the profitability of an investment, but neither is inherently
superior to the other. The choice between NPV and IRR depends on the specific
characteristics of the investment and the preferences of the decision-maker.
NPV calculates the present value of all expected future cash flows of an
investment, including the initial investment, and compares it to the cost of the
investment. If the NPV is positive, the investment is expected to be profitable and
may be accepted. NPV is an absolute measure of profitability, and is typically used
to compare different investment options with different cash flow profiles.
IRR, on the other hand, is the discount rate that makes the NPV of the investment
equal to zero. It is a relative measure of profitability, and indicates the rate of
return the investment is expected to generate. IRR is often used as a measure of
investment performance, and is compared to the required rate of return or
minimum acceptable rate of return to determine whether the investment is
worthwhile.
One advantage of using IRR is that it accounts for the timing of cash flows and can
be used to compare investments with different timing and duration. However, IRR
has some limitations, such as the potential for multiple rates of return for complex
projects or investments with irregular cash flows.
In summary, both NPV and IRR have their advantages and limitations, and should
be used in conjunction with other measures of investment performance and risk to
make informed investment decisions. The choice between NPV and IRR ultimately
depends on the specific context and preferences of the decision-maker.