Question

Find the internal rate of return (IRR) for the following series of future cash flows. The initial outlay is $564,600 Year 1:179,200 Year 2: 133,800 Year 3: 127,600 Year 4: 172,200 Year 5: 167,900 Round the answer to two decimal places in percentage form. (Write the percentage sign in the "units" box) You should use Excel or financial calculator.

Answer 1

IRR is a rate of return at where NPV is zero.... NPV = Present value of cash inflows - Present value of cash outflows To compute IRR , we should go for trail and error appraoch and test it. If discount rate = 10% Computation of NPV of project Year Cash flows PVIF @10% Present value of cash flows 0 ($564,600) 1 ($564,600) 1 $179,200 0.9091 $162,910.72 2 $133,800 0.8264 $110,572.32 3 S127,600 0.7513 $95.865.88 4 $172,200 0.683 $117.612.60 5 $167,900 0.6209 $104,249.11 NPV $26,610.63

If discount rate = 12% Computation of NPV of project Year Cash flows PVIF@11% Present value of cash flows 0 ($564,6001 ($564,600) 1 $179,200 0.9009009 $161.441.44 2 $133.800 0.8116224 $108.595.08 3 $127.600 0.7311914 $93,300.02 4 $172.200 0.658731 $113,433.47 5 $167.900 0.5934513 $99.640.48 NPV $11.810.49 At 10%, NPV = $26,610.63 At 12%, NPV = $11,810.49 Due to increase in discount rate of 2%, decrease in NPV = $26,610.63 - $11,810.49 = $14.800.14 To get decrease in NPV of $26,610.63, required discount rate = 2% * $26.610.63 / $14.800.14 = 3.5959971 % Therefore IRR = 10% +3.5959971% = 13.5959971% = 13.6% (Rounded) Ans : IRR = 13.6 %