Capital Budgeting Techniques: Estimation of Internal Rate of Returns

Abstract

The enormity of costs associated with long-term assets and the length of exposure to risk of such investments makes it essential to properly evaluate capital budgeting decisions before embarking on them. The estimation of cash flows of uncertain future period itself is problematic and to add a complex technique of project evaluation that will require trial and error could be frustrating. This study is to simplify the estimation of Internal Rate of Return (IRR) without going through the rigours of trial and error process. This study is a method article on the estimation of IRR. The study allows the estimation of IRR even when net present value at two levels are positive or the two are negative instead of the use of interpolation. Investments analysists were advised to properly evaluate projects so that investors will source for funds where the interest rate is lower than the projects’ IRR.