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Cleopatra's Place costs $360,000 and is expected to generate $110,000 per year during each of the...

Cleopatra's Place costs $360,000 and is expected to generate $110,000 per year during each of the next 4 years. What is the Internal Rate of Return (IRR) of this project? (Could you explain in detail on paper?)

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Answer #1

Net present value at 8% =

$110,000 * (PVAF (8% , 4 years) - $360,000 = $364,333.95 - $360,000

Net Present value = $4,333.95

Net present value at 9% =

$110,000 * PVAF(9% , 4 years) - $360,000 = $356,369.19 - $360,000

Net Present value = -$3,630.81

by using Interpolation method, IRR can be computed as

= Lower discount rate + [{NPV @ lower discount rate / (change in NPV's)) * change in discount rate]

= 8% + [{4,333.95 / ($4,333.95 - (-$3,630.81)} * (9% - 8%)

= 8% + 0.54

= 8.54%

So, IRR = 8.54%

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