What is the IRR of the project? What is the NPV of the project, based on the required rate of return of 12%?

IRR is calculated by discounting the cash flow of the project to its initial cost. Calculate this by solving the equation for interest rates where net present value is equal to zero. To calculate NPV, one must first determine all expected cash inflows and outflows associated with a project – then discount them at the required rate of return to reflect their current worth. For example, if a project’s required rate of returns is 12 percent then the NPV will be:

N PV = [(C1/[1+12%] + C2/[1+12%]² + … ]- I

Where C is the expected cash flow in future and I represents initial investment costs. Once both calculations are completed – IRR and NPV – they can used to evaluate whether or not a particular project should be pursued based on its financial viability.

In the end, these metrics allow businesses to make informed decisions regarding resource allocation.