Question

Project A cost $67,775 its expected net cash inflows are $10,000 per year for 10 years...

Project A cost $67,775 its expected net cash inflows are $10,000 per year for 10 years and its WACC is 8%

what is its IRR

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Answer #1

t=0 CF= -$67,775

t=1 CF= +$10,000

t=2 CF= +$10,000

t=10 CF= +$10,000

IRR is the rate which equls future cash flows to initial investment.

We can set up a mathematical equation:

67775 = 10,0000/(1+r) +  10,0000/(1+r)2 +  10,0000/(1+r)3 + ... +  10,0000/(1+r)10

67775/10000 = 1/(1+r) +  1/(1+r)2 +  1/(1+r)3 + ... +  1/(1+r)10 ...(1)

*One way to solve is to plug values for 'r' till we get the right estimate for 'r'. We can solve this is in excel using solver function.

**We can also use financial calculator.

Using financial calculator: N=10, PV= -67775, PMT=10000 then Compute I/Y => I/Y=7.778954%

So IRR = 7.79% (rounded), if we plug in (1), we get RHS=LHS.

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