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Can a project's Internal Rate of Return (IRR) be calculated without knowing the discount rate? Explain.

Can a project's Internal Rate of Return (IRR) be calculated without knowing the discount rate? Explain.

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Answer #1

Internal Rate of Return can be calculated or cannot be calculated without knowing discount rate is discussed below.  As the internal rate of return is calculated for the series of cash flow. Discount Rate or ineterst rate or cost of capital is required to calculate internal rate of return.

For example :ABC requires the IRR of project to be calculated to determine whether to accept or reject the project. The discount rate is 12.5%. The investment at starting required is $10 million.

Therefore at the end of each year cash flows would be calculated as follows:

Year Cash Flow(in millions)
0 -10 million
1 4 million
2 3 million
3 3 million
4 4.5 million

Therefore, IRR would be calculated on the basis of these cash flows and cash flows would be recorded on the basis of discount rate. Therefore, discount rate is necessary to calcculate Internal Rate of Return.

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