Quick Method of Calculating IRR

Normal Formula of Calculating IRR (K) is:

n
I=∑ Ct
t=1 ( 1 + K)t
where I = Initial Investment
Ct = Cash flow in year ‘t’
K = IRR
Quick Method:
Formulas:
1. n 2. n
Bo = ∑ Ct - I B1 = ∑ ( t x Ct)
t=1 t=1
3. n 4. n
B2 = ½ ∑ { (t-1) x t x Ct } B3 =1/6 ∑ [(t-2)x{(t-1)x t x Ct}]
t=1 t=1
5. A = Bo (B1² - BoB2) 7. IRR = A/B
6. B = (B1-Bo) ( B1² - BoB2) – Bo( B1B2- BoB3)
Example:
A project is expected to generate the cash flow over its life
of 6 years as follows. Initial investment is Rs. 11.5.
Year Cash flow Year Cash flow
1 5 4 2
2 6 5 2
3 3 6 3
Calculate IRR by Quick Method.
Working
t Ct t x Ct (t-1) x t x Ct (t-2) x [ (t-1) x t x Ct]
1 5 5 0 0
2 6 12 12 0
3 3 9 18 18
4 2 8 24 48
5 2 10 40 120
6 3 18 90 360
Total 21 62 184 546
Bo = 21 – 11.5 = 9.5

B1 = ∑ t x Ct = 62

B2= ½ ∑ (t-1) x t x Ct = 184/2 =92

B3 =1/6 ∑ (t-2) x [ (t-1) x t x Ct] = 546/6 =91

A = Bo (B1² - BoB2) = 9.5 x {(62)² - (9.5 x 92) = 28,215

B= (B1-Bo) ( B1² - BoB2) – Bo( B1B2- BoB3)

= (62 – 9.5 ) { (62) ² - ( 9.5 x 92 )} – 9.5{ (62 x 92 ) – (9.5 x 91)}
= 1,55,925 – 45,975.25
= 109,949.75

IRR = A/B = 28,215 = 25.66%

109,949.75

The actual IRR is 25.63%

Problem
The following is the cash flow estimate for a project whose
initial investment will be Rs. 16 lakhs.

Year Cash Flow (in lakhs)

1 5
2 3
3 7
4 2
5 8
Calculate the internal rate of return using a quick method
of calculation.
(Ans. IRR = 15.9462382%)