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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Ganga Pharma invests ₹1,00,000 today in a project that yields a single cash inflow of ₹1,61,051 at the end of year 5, with no other cash flows. Which statement about the project's internal rate of return (IRR) is correct?

The IRR is 10%. IRR is the discount rate at which the present value of the inflow equals the outlay, and ₹1,00,000 compounded at 10% for five years gives exactly ₹1,61,051. Simple averaging of gains ignores compounding.

  1. AIRR is 8%, because the average annual gain is below the cost of capital
  2. BIRR is 12.2%, being the average simple annual return on the investment
  3. CIRR is 10%, because 1,00,000 compounded at 10% for 5 years equals 1,61,051Correct
  4. DIRR is 61.05%, being the total return over the project life

Explanation

IRR is the rate that equates PV of inflows to outlay. 1.1^5 = 1.61051, so 1,00,000 × 1.61051 = 1,61,051 and IRR is 10%. The 12.2% option divides total gain of 61,051 by 5 years, ignoring compounding.

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