CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Mehta Exports invests ₹2,00,000 in a project that returns a single lump sum of ₹2,88,000 at the end of year 2, with no other cash flows. What is the project's internal rate of return (IRR)?
The IRR is 20%. It is the rate that equates the present value of ₹2,88,000 received after two years with the ₹2,00,000 outlay, so (1+r) squared equals 1.44 and r is 20%. The 44% figure is the total undiscounted return over two years.
- A20%Correct
- B22%
- C24%
- D44%
Explanation
IRR is the rate r at which 2,00,000 = 2,88,000 / (1+r)^2. So (1+r)^2 = 1.44 and 1+r = 1.2, giving r = 20%. The 44% option is the total gain over two years, ignoring compounding. The 22% option divides that total gain by 2, which is a simple average and not the IRR.
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