Question

If a project has an initial outlay of $41,000 and cash flows of $14,000 per year for the next 5 years, what is the IRR of this project? (Answer to the nearest tenth of a percent, e.g. 12.3).

Answer 1

The IRR is the rate at which NPV is zero.

Lets compute NPV at 20% as follows:

= - $ 41,000 + $ 14,000 / 1.20¹ + $ 14,000 / 1.20² + $ 14,000 / 1.20³ + $ 14,000 / 1.20⁴ + $ 14,000 / 1.20⁵

= $ 868.5699588

Lets compute NPV at 21% as follows:

= - $ 41,000 + $ 14,000 / 1.21¹ + $ 14,000 / 1.21² + $ 14,000 / 1.21³ + $ 14,000 / 1.21⁴ + $ 14,000 / 1.21⁵

= - $ 36.2192953

So, the IRR will be as follows:

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

= 20% + $ 868.5699588 / [ ( $ 868.5699588 - ( - $ 36.2192953 ) ] x ( 21 - 20)

= 20% + $ 868.5699588 / $ 904.7892541

= 21% Approximately

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