Question

Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows −$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 a. 2.31% b. 2.82% c. 3.10% d. 2.08% e. 2.57%

Answer 1

IRR = Lower rate + (NPV(L)/NPV(L)-NPV(H)) * (higher rate - lower rate)

Here let lower rate = 2% and higher rate = 3%

Year	Cash flow	PVF @ 2%	PV
0	-9500	1	-9500
1	2000	0.9803922	1960.78
2	2025	0.9611688	1946.37
3	2050	0.9423223	1931.76
4	2075	0.9238454	1916.98
5	2100	0.9057308	1902.03
		NPV	157.93

Year	Cash flow	PVF @ 3%	PV
0	-9500	1	-9500
1	2000	0.970873786	1941.75
2	2025	0.942595909	1908.76
3	2050	0.915141659	1876.04
4	2075	0.888487048	1843.61
5	2100	0.862608784	1811.48
		NPV	-118.37

So IRR = 2% + 157.93 / (157.93-(-118.37)) * (*3-2) = 2.57%

OPTION E : 2.57%