Question

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

Year     Cash Flow

0          –$9,259            

1              3,100            

2             4,700            

3             6,600            

rev: 09_18_2012

22.01%

23.58%

21.34%

22.91%

22.46%

Answer 1

IRR is that disconu rate which makes NPV equal to 0

NPV = present value of cash inflows - present value of cash outflows

NPV = -9259 + 3,100 / ( 1 + R) + 4,700 / ( 1 + R)² + 6,600 / ( 1 + R)³

Lets try from the options given, lets start with 22.46%. use 22.46% as R

NPV = -9259 + 3,100 / ( 1 + 0.2246) + 4,700 / ( 1 + 0.2246)² + 6,600 / ( 1 + 0.2246)³

NPV = -9259 + 2,531.44 + 3,134.1 + 3,593.86

NPV = 0

Since 22.46% is the discount rate that make NPV equal to zero, 22.46% is the IRR