Question

Filter Corp. has a project available with the following cash flows:

Year Cash Flow

0 −$13,500

1 6,400

2 7,700

3 4,500

4 4,100

What is the project's IRR?

Answer 1

IRR is the rate at which NPV is zero.

Lets compute NPV at 27% as shown below:

= - $ 13,500 + $ 6,400 / 1.27 + $ 7,700 / 1.27² + $ 4,500 / 1.27³ + $ 4,100 / 1.27⁴

= $ 86.28071835

Lets compute NPV at 28% as shown below:

= - $ 13,500 + $ 6,400 / 1.28 + $ 7,700 / 1.28² + $ 4,500 / 1.28³ + $ 4,100 / 1.28⁴

= - $ 127.1567345

It means the IRR lies between 27% and 28% since the initial investment of $ 13,500 is recovered between them and same is shown below:

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

= 27 + [ ($ 86.28071835) / ($ 86.28071835 - (- $ 127.1567345) ] x (28 - 27)

= 27.40% Approximately

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