Question

Tech Inc is considering a project that has the following cash flow data. What is the project’s IRR?

Year 0 1 2 3 4 5

cash flows -$1200 $325 $325 $325 $325 $225

Answer 1

Cash flows of the project are

Cash Flow for the Project
Year	0	1	2	3	4	5
Cash flow	-1200	325	325	325	325	225

IRR of a project is the rate of return earned by the project such that present value of cash inflows is equal to present value of cash outflows. It is the discount rate for which NPV of the project is equal to zero

0 = -1200 + 325 / (1 + IRR) + 325 / (1 + IRR)² + 325 / (1 + IRR)³ + 325 / (1 + IRR)⁴+ 225 / (1 + IRR)⁵

IRR can calculated by using IRR function in excel

Formula to be used in excel: =IRR(values)

where values are cash flows of the project

Using IRR function in excel, we get IRR of the project = 8.9712% = 8.97%