Question

The following table shows the cash flows for a project. The required rate of return in...

The following table shows the cash flows for a project. The required rate of return in 20%. Compute the IRR.

Year Project cash flow
0 -$120,000
1 $100,000
2 $40,000
3 $10,000

Group of answer choices

17%

20%

18%

19%

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Answer #1

IRR is that Discount rate, at which NPV is 0

NPV is sum of present value of all cash flows.

Present value of cash flows = cash flows * PVF

PVF = 1/(1+discount rate)^year

Assume irr is 17%

year Cash flows P.V.F.@ 17%
Year 0 -120000 1 -120000
Year 1 100000 0.8547008547 85470.08547
Year 2 40000 0.730513551 29220.54204
Year 3 10000 0.6243705564 6243.705564
NPV 934.3330755

Assume irr is 18%

year Cash flows P.V.F.@ 18%
Year 0 -120000 1 -120000
Year 1 100000 0.8474576271 84745.76271
Year 2 40000 0.7181844298 28727.37719
Year 3 10000 0.6086308727 6086.308727
NPV -440.5513709

IRR = Lower rate + (higher rate - lower rate)*(NPV at lower rate - 0)/(NPV at lower rate - NPV at higher rate)

17%+((18%-17%)*(934.3330755-0) /(934.3330755-(-440.5513709))

=0.1767957207 or 17.68%

So irr is 17.68% or 18%

answer is 18%

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