Question

A project has an initial outlay of $1,819. It has a single cash flow at the end of year 8 of $5,334. What is the internal rate of return (IRR) for the project? Round the answer to two decimal places in percentage form.

Answer 1

		9%		12%		14%		15%
Period	Cash Flow	Discountig Factor [1/(1.09^period)]	PV of cash flows (cash flow*discounting factor)	Discountig Factor [1/(1.12^period)]	PV of cash flows (cash flow*discounting factor)	Discountig Factor [1/(1.14^period)]	PV of cash flows (cash flow*discounting factor)	Discountig Factor [1/(1.15^period)]	PV of cash flows (cash flow*discounting factor)
0	-1819	1	-1819	1	-1819	1	-1819	1	-1819
1		0.9174312	0	0.8928571	0	0.877193	0	0.8695652	0
2		0.84168	0	0.7971939	0	0.7694675	0	0.7561437	0
3		0.7721835	0	0.7117802	0	0.6749715	0	0.6575162	0
4		0.7084252	0	0.6355181	0	0.5920803	0	0.5717532	0
5		0.6499314	0	0.5674269	0	0.5193687	0	0.4971767	0
6		0.5962673	0	0.5066311	0	0.4555865	0	0.4323276	0
7		0.5470342	0	0.4523492	0	0.3996373	0	0.375937	0
8	5334	0.5018663	2676.95474	0.4038832	2154.313138	0.3505591	1869.881999	0.3269018	1743.6941
		NPV =	857.954736	NPV =	335.313138	NPV =	50.88199857	NPV =	-75.30594

IRR is the rate of return at which NPV=0

Here, NPV@14% is positive and @15% is negative.

Therefore, IRR is between 14% and 15%

IRR = Rate at which positive NPV + [Positive NPV/(Positive NPV-Negative NPV)]

= 14% + [50.882/(50.882-(-75.30594)]

= 14% + [50.882/126.18794]

= 14% + 0.403% = 14.4%