Question

Determine the internal rate of return for a project that costs -$71,500 and would yield after-tax cash flows of $11,000 the first year, $13,000 the second year, $16,000 the third year, $18,000 the fourth year, $22,000 the fifth year, and $28,000 the sixth year.

Answer 1

IRR is the rate at which the NPV of a project equals zero.

NPV = Present value of all future cash flow - initial cost

0 = 11000/(1+IRR)^1 + 13000/(1+IRR)^2 + 16000/(1+IRR)^3 + 18000/(1+IRR)^4 + 22000/(1+IRR)^5 + 28000/(1+IRR)^6 - 71500

We will use the heat and trial method to get that value for which the above equation satisfy.

ytm = 11.23% Answer

Or using financial calculator:

2nd CF

Cfo = -71500

C01 = 11000

C02 = 13000

C03 = 16000

C04 = 18000

C05 = 22000

C06 = 28000

IRR -> CPT

IRR = 11.23% Answer