Question

Internal rate of return   For the project shown in the following​ table, calculate the internal rate of return

​(IRR). Then​ indicate, for the​ project, the maximum cost of capital that the firm could have and still find the IRR acceptable.

Initial investment   $160,000
Year (t)   Cash inflows
1   $35,000
2   $25,000
3   $45,000
4   $45,000
5   $45,000

The​ project's IRR is?

The maximum cost of capital that the firm could have and still find the IRR acceptable is?

Answer 1

Cash Flows:
Year 0 = -$160,000
Year 1 = $35,000
Year 2 = $25,000
Year 3 = $45,000
Year 4 = $45,000
Year 5 = $45,000

Let IRR be i%

NPV = -$160,000 + $35,000/(1+i) + $25,000/(1+i)^2 + $45,000/(1+i)^3 + $45,000/(1+i)^4 + $45,000/(1+i)^5
0 = -$160,000 + $35,000/(1+i) + $25,000/(1+i)^2 + $45,000/(1+i)^3 + $45,000/(1+i)^4 + $45,000/(1+i)^5

Using financial calculator, i = 6.50%

The project’s IRR is 6.50%
The maximum cost of capital that the firm could have and still find the IRR acceptable is 6.50%