Question

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?

Answer #1

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 %

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