Question

Determine the IRR of a $200,000 project having annual cash flows of $30,000 over its fifteen year life

a.8.4%

b.10.4%

c.9.4%

d.12.4%

e.11.4%

Answer 1

The IRR is the interest rate that makes the NPV of the project equal to zero. The IRR for this project is:

0 = -$200,000 + $30,000/(1 + IRR) + $30,000/(1 + IRR)^2 + $30,000/(1 + IRR)^3 + $30,000/(1 + IRR)^4 + $30,000/(1 + IRR)^5 + $30,000/(1 + IRR)^6 + $30,000/(1 + IRR)^7 + $30,000/(1 + IRR)^8 + $30,000/(1 + IRR)^9 + $30,000/(1 + IRR)^10 + $30,000/(1 + IRR)^11 + $30,000/(1 + IRR)^12 + $30,000/(1 + IRR)^13 + $30,000/(1 + IRR)^14 + $30,000/(1 + IRR)^15

IRR = 12.4%