Question

A project has the following cash flows.

C0	C1	C2	C3
($770)	$290	$530	$236

Calculate an IRR for the project using an iterative technique. (Hint: Start by guessing 17%.) Do not round intermediate calculations. Round PVF values in intermediate calculations to four decimal places. Round the answer to whole percentage.

%

Answer 1

The IRR is the rate at which NPV is zero.

Lets compute NPV at 17% as shown below:

= - $ 770 + $ 290 / 1.17 + $ 530 / 1.17² + $ 236 / 1.17³

= $ 12.3864 Approximately

Lets compute NPV at 18.50% as shown below:

= - $ 770 + $ 290 / 1.1850 + $ 530 / 1.1850² + $ 236 / 1.1850³

= - $ 6.02 Approximately

It means that the IRR lies between 17% and 18.50% and is computed as follows:

= Lower rate + [ Lower rate NPV / ( Lower rate NPV - Higher rate NPV ) ] x ( Higher rate - Lower rate)

= 17 + [ $ 12.3864 / ( $ 12.3864 - ( - $ 6.02) ] x ( 18.50 - 17)

= 17 + [ $ 12.3864 / $ 18.4064 ] x 1.50

= 17 + 1

= 18% Approximately

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