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CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting

Kaveri Pharma's project costs ₹2,00,000 and gives inflows of ₹1,20,000 at the end of Year 1 and ₹1,44,000 at the end of Year 2. Using the IRR rule, what is the IRR?

The IRR is 20%. Discounting the two inflows at 20% gives ₹1,00,000 each (1,20,000/1.2 and 1,44,000/1.44), totalling ₹2,00,000, which exactly equals the initial outlay. NPV is therefore zero at 20%, which is the definition of the internal rate of return.

  1. A20%Correct
  2. B10%
  3. C25%
  4. D32%

Explanation

At 20%: 1,20,000/1.2 = 1,00,000 and 1,44,000/1.44 = 1,00,000; total PV = 2,00,000, equal to the outlay, so NPV = 0. At 10% the PV would be 1,09,091 + 1,19,008 = 2,28,099, exceeding the cost, so 10% is too low. Hence IRR is 20%.

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