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A firm is trying to determine if it should launch a product. The product has an...

A firm is trying to determine if it should launch a product. The product has an expected life of three years. It will bring in cash flows of $10,000 in the first year, $9,000 in the second year, and $7,500 in the third year. The company estimates that it will invest $20,000 in product research and development costs. What is the estimated IRR for this product? Choose the IRR value that is closest to the amount invested.

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Answer #1

Let irr be x%
At irr,present value of inflows=present value of outflows.

20,000=10,000/1.0x+9000/1.0x^2+7500/1.0x^3

Hence x=irr=16.37%(Approx).

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