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​(IRR calculation)  Jella Cosmetics is considering a project that costs ​$825,000 and is expected to last...

​(IRR calculation)  Jella Cosmetics is considering a project that costs ​$825,000 and is expected to last for 8 years and produce future cash flows of ​$180,000 per year. If the appropriate discount rate for this project is 15 ​percent, what is the​ project's IRR?

The​ project's IRR is _____%.  ​(Round to two decimal​ places.)   

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Answer #1

The IRR is the rate at which NPV is zero.

Lets compute NPV at 14% as shown below:

= - $ 825,000 + $ 180,000 / 1.14 + $ 180,000 / 1.142 + $ 180,000 / 1.143 + $ 180,000 / 1.144 + $ 180,000 / 1.145 + $ 180,000 / 1.146 + $ 180,000 / 1.147 + $ 180,000 / 1.148

= $ 9,995.500906

Lets compute NPV at 15% as shown below:

= - $ 825,000 + $ 180,000 / 1.15 + $ 180,000 / 1.152 + $ 180,000 / 1.153 + $ 180,000 / 1.154 + $ 180,000 / 1.155 + $ 180,000 / 1.156 + $ 180,000 / 1.157 + $ 180,000 / 1.158

= - $ 17,282.12862

It means that the IRR lies between 14% and 15% and is computed as follows:

= Lower rate + [ Lower rate NPV / ( Lower rate NPV - Higher rate NPV ) ] x ( Higher rate - Lower rate)

= 14 + [ $ 9,995.500906 / ( $ 9,995.500906 - ( - $ 17,282.12862 ) ] x ( 15 - 14)

= 14 + [ $ 9,995.500906 / $ 27,277.62952 ] x 1

= 14.36% Approximately

Feel free to ask in case of any query relating to this question

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