 The internal rate of return is one of two capital budgeting analysis techniques to consider the time value of money in its calculations. The other is the net present value. Recall that the payback period technique does not consider the time value of money, and that is one of the weaknesses of that method. The internal rate of return is the rate of return a company can expect from investing in a capital project. When the internal rate of return and the discount rate are the same, net present value is zero. Projects with internal rates of return greater than or equal to the discount rate are acceptable. The discount rate is not used in IRR calculations. Since IRR is only based on the discounted net cash inflows and outflows, the change in the discount rate has no impact on IRR, meaning how a project is financed does not impact the internal rate of return. When I solve internal rate of return assignments, I usually set up a table like this. Under the items column, I can enter the items that create cash inflows and outflows. The other columns group the cash flows in the period in which they occur. They can be netted together, and I can use Excel to solve for IRR. Let's look at an example. Atamant is considering the purchase of a $25,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year life, it will have $5,000 scrap value. The discount rate is 12%. So you can see I listed the items in the table and when their related cash flows occur. I also made sure to note which were cash inflows, like the savings in operating costs and the salvage value, and which were cash outflows, like the initial cost of the machine. Then I can solve for IRR using the Excel formula, equals IRR, open parentheses, and then you highlight the cash flow range, closed parentheses. Two things to remember in order to solve this correctly. First is to make sure the initial cash outflow is negative. There is no way to determine the return on investment if all the numbers are positive. The second is the order of cash flows in the range have to be correct. For example, had I not netted the year five numbers together and just added a six-year for the salvage value, I would get an incorrect IRR because the solution would think that that happened in year six rather than year five. Okay, so I enter equals IRR, open parentheses, and then I highlight the entire range of cash flows, which is I16 to M16, and that gives me a return of an IRR of 16.48%. Our investment decisions on investments with IRRs greater than or equal to the discount rate are acceptable. All things being equal.