Question

The cash flows for Project dumb & dumber are below: End-of-Year Cash Flow: dumb year 0:...

The cash flows for Project dumb & dumber are below: End-of-Year Cash Flow: dumb year 0: −850, 1: 300, 2: 200, 3: 150 dumber year 0: −950, 1: 200, 2: 100, 3: 50 Assume that the firm’s WACC = r = 8%. What is the IRR for project dumb?

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Answer #1

Dumb project:

IRR is rate where NPV = 0

IRR is obtained from trial and error method we have to fix such rate for discount that it forces NPV = 0 or sum of all cash flows equal to zero

IRR = R =

-13.7249%

Present Values (PV)

Year

Cash flows

Discount factor or PV factors = Df = 1/(1+-0.137249)^Year

PV of cash flows = Cash flows x Df

0

-850.00

1.000000

-850.0000

1

300.00

1.159084

347.7251

2

200.00

1.343475

268.6950

3

150.00

1.557200

233.5799

Total of PV = NPV =

$0.00
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