An Interesting Reference to HP (38C) Financial Calculator

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An excerpt from Finance for Non-Financial Managers, © 1985 by Methuen Publications, ISBN 0-458-98800-6, 290 pages {page 234}


                                Internal Rate of Return (IRR)
What it is. The internal rate of return, also known as the "discounted cash flow," the "true yield," or the "investors method," can be described as the specific interest rate used to discount all future cash inflows, so that their present value equals the initial cash outflows. The financial community has used the discounting mechanism for many decades to calculate insurance premiums and bond yields. A little more recently (within twenty-five years), the industrial community has taken it up to measure capital projects.
  What it does. It shows the economic merits of independent projects and of mutually exclusive ones, and compares their returns to other financial indicators, such as the weighted cost of capital and the company's aggregate rate of return.
  How it works. The internal rate of return is found by trial and error (if a calculator like the HP-38C or a computer is not available). Once the total annual cash flows are estimated, the present value of the cash inflows and outflows are computed by using an arbitrary interest rate. The totals are then compared. If the present value of the cash inflows is lower than the cash outflows, the procedure is repeated, this time using a lower interest rate. If, however, the present value of the cash inflows is higher than the cash outflows, a higher interest rate is called for. The process continues until the total net cash flows equal zero.

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