Question

Warm Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.

Year	0	1	2	3	4
Cash flows	-$1540	$400	$400	$400	$400

a. 1.547%

b. 1.22%

c. 4.13%

d. 3.58%

e. 0.99%

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

Initial investment = Annuity * [1 - 1 / (1 + r)ⁿ] /r

1540 = 400 * [1 - 1 / (1 + r)⁴] /r

Using trial and error method, i.e., after trying various values for R, lets try R as 1.547%

1540 = 400 * [1 - 1 / (1 + 0.01547)⁴] /0.01547

1540 = 400 * 3.84996

1540 = 1,540

Therefore, IRR is 1.547%