Internal rate of return
You'll learn what internal rate of return (IRR) is and how to calculate it using the standard formula. IRR expresses a project's return as a percentage and identifies the discount rate at which net present value equals zero—essentially where a project breaks even.
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In this lesson
- 0:00 Internal rate of return explained
- 1:45 IRR calculation methodology
- 3:38 Project Delta worked example
- 6:07 Evaluating IRR acceptability
- 6:44 IRR versus NPV comparison
About this lesson
This video walks you through the calculation method using two different discount rates, then compares IRR to net present value to help you understand when each tool is most useful for investment appraisal decisions. The lesson covers the practical calculation process step-by-step, including a worked example with Project Delta. You'll see how to apply the IRR formula (which you'll need to memorise for the exam), handle negative numbers correctly, and follow the correct order of operations. The video also explains why IRR can be misleading when comparing projects of different sizes, and why net present value is often considered the superior decision-making tool for protecting shareholder wealth. This content is essential for FM, AFM, and performance management modules where investment appraisal and capital budgeting decisions are tested. Understanding both the strengths and limitations of IRR—particularly how it differs from NPV—will help you answer case study and objective test questions with confidence and choose the right evaluation method for different business scenarios.
Duration: 8m
Transcript
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