[Anonymous]

Hello, Could someone please help me with this formula? I’m using Roger CPA Review and the book says IRR = Investment/Annual Cash Flow. However, the homework forum and the MCQs say IRR = Annual Cash Flow/Investment.
Which is it?

I tried solving for it myself like this, if IRR is the rate at which investment is the same as returns then
Investment = Annual Cash Flow x PV Factor
Investment/Annual Cash Flow = PV Factor (which you then use on the table to find the interest rate)

Also, if IRR is the rate at which NPV = 0 and NPV = PV of Cash Inflows – PV of Cash Outlfows (aka Invesment)
then 0 + Investment = PV of Cash Inflows
Investment = Cash Inflows x PV Factor
Investment/Cash Inflows = PV Factor (which you then use on the table to find the interest rate)

Both ways I end up with Investment as the numerator which jives with the lecture and book. However the instructors and the MCQs are saying it’s flipped. It’s really throwing me for a loop, which is it and why?

Thank you very much.

[Anonymous]

A simple way to think of IRR is what you made with amount invested/ amount invested. So I believe it is cash flow/investment.

And be careful with calculating IRR. It is simple for a one period investment, but with multiple periods, it is only solvable by trial and error or a calculator. Also, some problems have more than one IRR, so be cognizant of that as well.
And if I am reading what you wrote correctly, to calculate a present value of an amount, you need to use a particular rate, but this is the end goal of what you are trying to find out.

* an intenal rate of return is simply the interest rate that makes the NPV = 0. It has no bearing on actual market rates of interest. Hope this made a little bit of sense.

[Author]

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