**Internal Rate of Return**is the

**rate**at which the

**Net Present Value is Zero.**This is among the most used calculation in Capital Budgeting.

__IRR is also known as Discounted Cash Flow of Return or Economic Rate of Return.__**OR**

__If__**IRR > Expected Rate of Return;**Project is Profitable

__If__**IRR < Expected Rate of Return;**Project is not Profitable**At IRR, present value of all tax-free future cash flows becomes equal to the initial investment.**- If
**IRR is greater than the expected rate of return,**then the**project is profitable.** - For
**individual project,**if**the IRR is greater than the expected rate of return, project should be taken.** - For
**comparing between the projects, the project with highest IRR must be taken if it is greater than the expected rate of return.** - IRR Calculation for an investment is easy if the life cycle of the investment is short, but
**if the life cycle of the investment is of many years, the IRR is calculated by hit and trial.**

**Example 1:**A project requires an input capital of Rs. 10000.00 and generates the cash flow of Rs. 12000.00 after a year. The required rate of return is 25%. Calculate the profitability of the project.

**Solution:**

Calculating IRR by substituting NPV = 0

**IRR = 0.2 or 20%**