Question

Tesla is considering investing in Project M. The projects generate the following cash flows: Year 0 Year 1 Year 2 Project M -464 247 330 The MARR is 10% per year, compounded annually. Compute the Internal Rate of Return (IRR) of the project. (note: if your answer is 17.25% then write 17.25 as your answer, not 0.1725)

Answer 1

Approximate IRR can be calculated using Interpolation.

IRR = RL + [NPVL / (NPVL - NPVH)] x (RH - RL) where

RL: Lower discount rate = 5% (assumed)

RH: Higher discount rate = 10% (assumed)

NPVL: NPV at 5%

NPVH: NPV at 10%

S;:

NPVL = - 464 + 247 x P/F(5%, 1) + 330 x P/F(5%, 2)

= - 464 + 247 x 0.9524** + 330 x 0.9070**

= - 464 + 235.24 + 299.31

= 70.55

NPVH = - 464 + 247 x P/F(10%, 1) + 330 x P/F(10%, 2)

= - 464 + 247 x 0.9091** + 330 x 0.8264**

= - 464 + 224.55 + 272.73

= 33.28

Therefore,

IRR (%) = 5 + [70.55 / (70.55 - 33.28)] x (10 - 5)

= 5 + (70.55 / 37.27) x 5

= 5 + 9.46

= 14.46

**From P/F factor table