UK IRR and cost of capital


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Hello,
I'm hoping someone can help me out with an issue I'm having with IRR and the cost of capital. I just can't get my head around it!
If you have future cash flows, do you apply the discount factor based on the cost of capital and use the Discounted Cash Flow amounts for the IRR formula, or do you use the values based on the cash flow based on year 0 values?
As an example

PROJECT 1
Cost of capital 5%
YearCash Flow (CF)Discount FactorDiscounted Cash Flow (DCF)
0(3000)1(3000)
15000.952476
230000.9072721
35000.864432
IRR15.62%10.11%

So in this example which IRR figure is correct, 15.62% or 10.11%?
 
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kirby

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If you are assuming that interest rates are ZERO (unreal assumption although came very close to reality at times) then use the 15.62% figure. Otherwise the 10.11% figure makes more sense.
 

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