Question

What is the IRR of the following set of cash flows?

Year Cash Flow

0 -11,109

1 4,500

2 6,800

3 5,500

A) 21.85%, B) 23.46%, C) 23%, D) 24.15%, E) 22.54%

Answer 1

The correct choice is C ) 23%

Annuity = ( $ 4500 + $ 6800 + $ 5500) 3

Annuity = $ 5600

Payback period = $ 11,109 $ 5600

Payback period = 1.98375

From the present value interest factor annuity table, find the interest rate close to 1.98375 for n = 3 years

From the table , we find the interest rate as 24%

Find the net present value of cash flows at r = 24%

NPV @ 24% = -172.81

Find the net present value of cash flows at r = 23%

NPV @ 23% = - 0.17277

NPV @ 22% = 177.07

IRR = 22% + [ 11286 - 11109 ] [ 11286 - 11108.83 ]

IRR = 23%