Question

Compute the IRR static for Project E. The appropriate cost of capital is 9 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Time:	0	1	2	3	4	5
Cash Flow:	-$1,800	$670	$720	$680	$460	$260

IRR _____________ %

Should the project be accepted or rejected?

Answer 1

The IRR is the rate at which NPV is zero.

Lets compute NPV at 19% as shown below:

= - $ 1,800 + $ 670 / 1.19 + $ 720 / 1.19² + $ 680 / 1.19³ + $ 460 / 1.19⁴ + $ 260 / 1.19⁵

= $ 13.3270954 Approximately

Lets compute NPV at 20% as shown below:

= - $ 1,800 + $ 670 / 1.20 + $ 720 / 1.20² + $ 680 / 1.20³ + $ 460 / 1.20⁴ + $ 260 / 1.20⁵

= - $ 21.82355967 Approximately

It means that the IRR lies between 19% and 20% and is computed as follows:

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

= 19 + [ $ 13.3270954 / ( $ 13.3270954 - ( - $ 21.82355967) ] x ( 20 - 19)

= 19 + [ $ 13.3270954 / $ 35.15065507 ] x 1

= 19 + 0.38

= 19.38% Approximately

Since the IRR is greater than the cost of capital, hence the project shall be accepted.

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