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A project will generate annual cash flows of $237,600 for each of the next three years,...

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Finance

A project will generate annual cash flows of $237,600 for eachof the next three years, and a cash flow of $274,800 during thefourth year. The initial cost of the project is $749,600. What isthe internal rate of return of this project?

Answer & Explanation Solved by verified expert
4.2 Ratings (475 Votes)

IRR is the rate at which NPV=0.

It can be calculated by trial and error method

let find NPV at 11%

Year Cashflow PVF@11% Cashflow*PVF
0           (749,600) 1      (749,600.00)
1              237,600 0.9009 214054.05
2              237,600 0.8116 192841.49
3              237,600 0.7312 173731.07
4              274,800 0.6587 181019.27

NPV = PV of inflows-PV of outflows

= (214054.05+192841.49+173731.07+181019.27)-749600

= 761645.89-749600

= 12045.89

Since NPV is positive,, take a higher rate, say 12%

Year Cashflow PVF@11% Cashflow*PVF
0           (749,600) 1      (749,600.00)
1              237,600 0.8929 212142.86
2              237,600 0.7972 189413.27
3              237,600 0.7118 169118.99
4              274,800 0.6355 174640.37

NPV = PV of inflows-PV of outflows

= (212142.86+189413.27+169118.99+174640.37)-749600

= 745315.49-749600

= -4284.51

IRR = R1+(NPV1(R2-R1))/(NPV1-NPV2)

= 11+((12045.89*(12-11))/(12045.89+4284.51)

= 11+(12045.89/16330.4)

= 11.7376359428

= 11.74%
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Transcribed Image Text

A project will generate annual cash flows of $237,600 for eachof the next three years, and a cash flow of $274,800 during thefourth year. The initial cost of the project is $749,600. What isthe internal rate of return of this project?

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