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Worked example
IRR (internal rate of return), worked through a print shop
The internal rate of return is a project’s own return: the discount rate at which it exactly breaks even. Here it is worked step by step, by interpolation, through a print shop buying a press.
Updated September 2026 · 7 min read
Net present value tells you whether a project adds value at a given discount rate. The internal rate of return, or IRR, asks a different question: what return does the project actually earn? It is the discount rate at which the net present value is exactly zero, and you compare it with the cost of capital to decide. Let us work it out.
The idea, and the scenario
If a project's IRR is above the company's cost of capital, it earns more than the money costs, so you accept it. Below, you reject it. Merton Print is considering a new press costing £40,000 now, which it expects to bring in £15,000 of net cash each year for four years. Its cost of capital is 10%. What is the IRR, and should it buy the press?
Step 1: an NPV at a low rate (10%)
The inflows are the same each year, so we can use the four-year cumulative discount (annuity) factor, given in the exam tables. At 10% that factor is 3.170.
At 10% the NPV is +£7,550, so the true return is higher than 10%. We need a second, higher rate to bracket it.
Step 2: an NPV at a high rate (20%)
The four-year annuity factor at 20% is 2.589.
At 20% the NPV is negative, so the IRR sits between 10% and 20%.
Step 3: interpolate to the IRR
We estimate the IRR by linear interpolation between the two rates, using the formula IRR = L + [ NPVL ÷ (NPVL − NPVH) ] × (H − L), where L and H are the low and high rates:
IRR = 10% + [ 7,550 ÷ (7,550 + 1,165) ] × (20% − 10%) = 10% + (7,550 ÷ 8,715) × 10% = 10% + 8.7% = 18.7%.
The IRR of about 18.7% is comfortably above Merton's 10% cost of capital, so the press is worth buying. Note the decision agrees with the NPV, which was positive at 10%. Two measures, one answer, which is usually how it goes.
IRR versus NPV
IRR is popular because a single percentage is easy to grasp, but it is only an estimate here: interpolation assumes a straight line between the two points, when the real relationship curves, so the answer is approximate. IRR can also mislead when cash flows change sign more than once or when ranking competing projects. For those reasons NPV is the more reliable measure, and the exam expects you to know both and why NPV wins when they disagree.
Where this comes up in ACCA
IRR is a core part of investment appraisal in Financial Management (FM), taught alongside NPV, and it reappears in Advanced Financial Management (AFM). The interpolation method above is exactly what the exam asks for.
The best way to make it automatic is to work it. The free ACCA FM course on Clevernest teaches investment appraisal inside a real business, with hands-on exercises as you go.
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Frequently asked questions
What is the internal rate of return (IRR)?
The IRR is the discount rate at which a project's net present value is exactly zero, in other words the return the project itself earns. You accept the project if its IRR is above the cost of capital and reject it if the IRR is below.
How do you calculate IRR?
Work out the NPV at two discount rates, one giving a positive NPV and one negative, then interpolate: IRR = L + [NPV at L / (NPV at L - NPV at H)] x (H - L). In our example, 10% + [7,550 / 8,715] x 10% = about 18.7%.
What does the IRR tell you?
It tells you the project's own rate of return, which you compare with the cost of capital. In our example an IRR of 18.7% against a 10% cost of capital means the project comfortably earns more than its finance costs, so it should be accepted.
Which is better, IRR or NPV?
NPV is more reliable. IRR is an approximation when found by interpolation and can mislead with unconventional cash flows or when ranking projects. When the two measures disagree, follow the NPV. The exam expects you to know both and why.
Where is IRR tested in ACCA?
In Financial Management (FM), as a core part of investment appraisal alongside NPV, and again in Advanced Financial Management (AFM). The interpolation method is the one the exam requires.