Question

XYZ Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the WACC or negative, in both cases it will be rejected. Year 0 1 2 3 Cash flows -$1,000 $325 $425 $525

Answer 1

IRR = 12.1435% or 12.14%

IRR is obtained by trial and error. Please keep fixing different rates as Discount rate so that total of present value column becomes near to zero. IRR is rate where our NPV = 0.

If IRR is less than WACC we should reject the project. As in question we are not given WACC we cannot make decision here. But Decision rule is IRR > WACC or IRR should be more than WACC so that we can accept the project.

WORKING for IRR:

		Discount rate = R = 12.1435%	Present Values
Year	Cash flows	Discount factor or PV factors = Df = 1/(1+R)^Year	PV of cash flows = Cash flows x Df
0	-$1,000.00	1.000000	-$1,000.00
1	$325.00	0.891715	$289.81
2	$425.00	0.795155	$337.94
3	$525.00	0.709051	$372.25
		Total of Present values = NPV =	$0.00