Question

Global Group is considering a project that has the following cash flow and WACC data. What is the project's IRR? State in percentage terms without the percent sign symbol and round to the second decimal place. (Thus, 12.98756% would be written as 12.99 to be correct)

WACC:           12.34%

After Tax Salvage Value at end of year 4 = $200                                          

Year                            0                      1                      2                      3                      4  

Cash flows                 -$1,600                   $450                    $450                    $450                     $450

Answer 1

IRR is the rate at which NPV is zero.

Lets compute NPV at 8% as shown below:

= - $ 1,600 + $ 450 / 1.08 + $ 450 / 1.08² + $ 450 / 1.08³ + $ 450 / 1.08⁴ + $ 200 / 1.08⁵

= $ 37.46304858

Lets compute NPV at 9% as shown below:

= - $ 1,600 + $ 450 / 1.09 + $ 450 / 1.09² + $ 450 / 1.09³ + $ 450 / 1.09⁴ + $ 200 / 1.09⁵

= - $ 0.441013113

It means the IRR lies between 8% and 9% since the initial investment of $ 1,600 is recovered between them and same is shown below:

= Lower rate + [ (Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] x (Higher rate - lower rate)

= 8 + [ ($ 37.46304858) / ($ 37.46304858- (- $ 0.441013113) ] x (9 - 8)

= 8.99% Approximately

Feel free to ask in case of any query relating to this question