Question

You are reviewing a new project and have estimated the following cash flows: Year 0: CF = -170,000; Year 1: CF = 64,120;   Year 2:   CF = 70,800;   Year 3:   CF = 92,330

If the required rate of return is 12%, calculate IRR= (   ).

		25 %
		6  %
		17%
		8.7  %
		9.5 %
		10.5  %
		11.8  %
		12 %
		15.0   %
		16    %

Answer 1

Computation of IRR:

Year	Cash flow	Disc @ 12%	Discounted Cash flows	Disc @ 15%	DCF	Disc @ 20%
0	-170000	1	-170000	1	-170000	1	-170000
1	64120	0.892857143	57250	0.869565217	55756.52174	0.833333	53433.33
2	70800	0.797193878	56441.32653	0.756143667	53534.97164	0.694444	49166.67
3	92330	0.711780248	65718.67028	0.657516232	60708.47374	0.578704	53431.71
		NPV	9409.996811		-0.032875812		-13968.3

We know that at IRR, Present value of the Cash inflows is equal to the cost of the project.So NPV should be 0 at IRR

Hence from the above table we can see that IRR is 15%( Approximately)

So IRR = 15% ( Approximately)