Question

A firm evaluates all of its projects by applying the IRR rule. A project under consideration...

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

Year Cash Flows
0 -24326
1 12923
2 12936
3 12896

What is the IRR for this project

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Answer #1

The IRR is the rate at which the NPV of the project is zero.

Let's compute the NPV at 27% as shown below:

= - 24,326 + 12,923 / 1.271 + 12,936 / 1.272 + 12,896 / 1.273

= 165.6242226

Let's compute the NPV at 28% as shown below:

= - 24,326 + 12,923 / 1.281 + 12,936 / 1.282 + 12,896 / 1.283

= - 185.1064453

So, the NPV of the project will be as follows:

= Lower rate + Lower rate NPV / ( Lower rate NPV - higher rate NPV) x ( Higher rate - Lower rate)

= 27% +  165.6242226 / ( 165.6242226 - ( - 185.1064453 ) ] x 1

= 27% + 165.6242226 / 350.7306679

= 27.47% Approximately

Feel free to ask in case of any query relating to this question

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