Introduction to Finance

(1) 
Year
(2) 
Beginning 
Investment 
Value
(3) 
Cash 
Inflow 
(Savings)
(4) 
10% Return 
on the
Invested 
Funds 
(2) × 0.10
(5)
Reduction 
in the 
Invested 
Funds 
(3) – (4)
(6) 
Ending 
Value of 
Invested 
Funds 
(2) – (5)
1 $5,000.00
$2,010.57
$500.00
$1,510.57
$3,489.43
2 
3,489.43
2,010.57
348.94
1,661.63
1,827.80
3 
1,827.80
2,010.57
182.78
1,827.79
0.01
*
*
Value is not 0.00 due to rounding.
11
For several reasons, a project with an NPV below that of another project may have a higher IRR than the competing 
project. That is why it is best to calculate each project’s NPV in addition to the IRR. The project with the highest NPV 
is the one that is expected to add the most to shareholder wealth.

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17.5 Capital Budgeting Techniques—Modified Internal Rate of Return
535
This table shows that the yearly cash saving of $2,010.57 from the computer upgrade 
project represents a return on the funds that remain invested (Column 4) and a reduction in the 
funds that remain invested in the project (Column 5). The project does not earn a 10 percent 
return, or $500 annually, on the initial $5,000 investment for all three years. The 10 percent 
IRR represents the return on the funds that remain invested in the project over its lifetime 
rather than each year’s return on the original investment.
17.5
Capital Budgeting Techniques—
Modified Internal Rate of Return