Question

# What is the Internal Rate of Return on an investment with the following cash flows? Year...

What is the Internal Rate of Return on an investment with the following cash flows?

Year Cash Flow...

0 -\$761,125

1 \$330,500

2 \$454,700

3 \$161,200

a. 12.93 percent

b. 9.42 percent

c. 11.88 percent

d. 14.71 percent

e. 10.96 percent

Ans) a. 12.93 percent

Internal rate of return is the rate at which NPV is 0

Assume r = 12% , then NPV =

 Year Cash flow PVIF @ 12% PV 1 330500 0.8929 295089.29 2 454700 0.7972 362484.06 3 161200 0.7118 114738.98 Total of PV of cash inflow 772312.32 Less : Initial cash outflow 761125 NPV 11187.32

Assume r = 13% , then NPV =

 Year Cash flow PVIF @ 13% PV 1 330500 0.8850 292477.88 2 454700 0.7831 356096.80 3 161200 0.6931 111719.69 Total of PV of cash inflow 760294.36 Less : Initial cash outflow 761125 NPV -830.64

Using interpolation we can find IRR

 r NPV 12% 11187.32 13% -830.64 1% 12017.96 ? 11187.32

=11187.32 / 12017.96

= 0.93%

Thus IRR = 12%+0.93% = 12.93%