Question

a. Determine the internal rate of return of the following investment: Period Cash flow 0 −$15,094...

a. Determine the internal rate of return of the following investment:

Period Cash flow 0 −$15,094

1 10,000

2 10,000

3 1,000

b Draw the net present value profile for the investment of A. Using a hand calculator and the rollback method described in the chapter, compute the net present value using a discount rate of 0.10.

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Answer #1

a. IRR of the investment is found by using excel's IRR functions with cash flows as the input.

IRR is the rate at which NPV is zero.

IRR = 23.99%

b. NPV = Present value of the future cash flows - Initial investment

NPV = 10000/(1 + 0.10)^1 + 10000/(1 + 0.10)^2 + 1000/(1 + 0.10)^3 - 15,094

NPV = 9,090.9090909091 + 8,264.4628099174 + 751.3148009016 - 15,094

NPV = $3,012.68670173

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