Question

The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $113,550 and annual net cash flows of $30,000 for each of the six years of its useful life.

The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal. The following data is provided:
DATA
Period	Cash flow
0	-$113,550
1	$30,000
2	$30,000
3	$30,000
4	$30,000
5	$30,000
6	$30,000

Determine the internal rate of return for the proposal.

%

Answer 1

Correct Answer:

IRR = 15%

Working:

year	cash inflow (outflow)	Discount rate 10%	Discount rate 21%	Present value of cash flow	Present value of cash flow
0	$ (113,550.00)			$       (113,550.00)	$       (113,550.00)
1	$      30,000.00	$       0.91	$        0.87	$           27,272.73	$            26,086.96
2	$      30,000.00	$       0.83	$        0.76	$           24,793.39	$            22,684.31
3	$      30,000.00	$       0.75	$        0.66	$           22,539.44	$            19,725.49
4	$      30,000.00	$       0.68	$        0.57	$          20,490.40	$            17,152.60
5	$      30,000.00	$       0.62	$        0.50	$           18,627.64	$            14,915.30
6	$      30,000.00	$       0.56	$        0.43	$           16,934.22	$            12,969.83
				NPV 1	NPV 2
	NPV			$           17,107.82	$                  (15.52)

IRR = R1 + ((NPV1/ (NPV1 - NPV2)) x (R2 - R1))

R1 =	10%
R2=	15%
NPV 1=	$                      17,107.82
NPV 2 =	$                                  (15.52)
npv1-npv2	17,123.34
NPV1/(NPV1-NPV2)	$                        0.999094
R2-R1	5%
NPV1/(NPV1-NPV2) * (R2-R1)	5.0%
IRR = R1 + (NPV1/(NPV1-NPV2) * (R2-R1)	15.00%

End of answer.

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