Question

# 4. A project requires a \$15m investment today; beginning next year it will generate a cashflow...

4. A project requires a \$15m investment today; beginning next year it will generate a cashflow of \$1m each year, forever. What is the IRR of this project?

Now, IRR is the internal Rate of Return. It is the rate of Return where Net present Value of the project is 0, which means that NPV of a project will be 0.when the cash flows of the project are discounted using the IRR.

Therefore IRR = NPV \$ 0

Now NPV = Initial Investment - Present Value of Cash Flows.

Given that Initial Investment - \$ 15 Million

and Present Value of Cash Flows (Perpetuity)= Annual Cash Flows/ Rate of Return

Therefore Present Value of Cash Flows = \$ 1 Million / IRR

NowSolving the NPV equation for IRR

NPV = 0 (When Discounting the cash flows at IRR)

Initial Investment - Present Value of Cash Inflows = 0 (When Discounting the cash flows at IRR)

\$ 15 Million - \$ 1 Million / IRR = 0

Solving for IRR we get = 6.67 %