Question

Compute the internal rate of return for the cash flows of the following two projects: (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Year Project A Project B 0 –$ 8,800 –$ 6,400 1 3,400 1,900 2 4,200 4,500 3 3,000 2,600 Internal rate of return Project A % Project B %

Answer 1

	IRR : IRR Means with a particular Percentage rate , At that point the present value become the zero
	CALCULATION OF THE IRR OF THE PROJECT A
	First we calculate randomly present value with @ 10% discounting rate
	Years	Cash Flows	PVF @10%	Present Value
	0	-$8,800	1	-$8,800.00
	1	$3,400	0.9091	$3,090.91
	2	$4,200	0.8264	$3,471.07
	3	$3,000	0.7513	$2,253.94
		Net Present Value =		$15.93
	With PVF of 10% we are getting positive =			$15.93
	Secondly we calculate randomly present value @ 11 % discounting rate
	Years	Cash Flows	PVF @ 11%	Present Value
	0	-$8,800	1	-$8,800.00
	1	$3,400	0.9009	$3,063.06
	2	$4,200	0.8116	$3,408.81
	3	$3,000	0.7312	$2,193.57
		Net Present Value =		-$134.55
	With PVF of 11 % we are getting negative =			-134.55
	So the differecne in both % net present value is =			$15.93	"-"	-$134.55
	Total is become =			$150.48
	So , the difference % =			$15.93	"/"By	$150.48
	So , the difference % =			0.11
	So, the IRR =			10.11%
	Answer = IRR =		10.11%
	CALCULATION OF THE IRR OF THE PROJECT B
	First we calculate randomly present value with @ 18% discounting rate
	Years	Cash Flows	PVF @18%	Present Value		Cash Flows
	0	-$6,400	1	-$6,400.00		-$6,400
	1	$1,900	0.8475	$1,610.17		$1,900
	2	$4,500	0.7182	$3,231.83		$4,500
	3	$2,600	0.6086	$1,582.44		$2,600
		Net Present Value =		$24.44
	With PVF of 18% we are getting positive =			$24.44
	Secondly we calculate randomly present value @ 19 % discounting rate
	Years	Cash Flows	PVF @ 19%	Present Value
	0	-$6,400	1.0000	-$6,400.00
	1	$1,900	0.8403	$1,596.64
	2	$4,500	0.7062	$3,177.74
	3	$2,600	0.5934	$1,542.88
		Net Present Value =		-$82.74
	With PVF of 19 % we are getting negative =			-82.74
	So the difference in both % net present value is =			$24.44	"-"	-$82.74
	Total is become =			$107.18
	So , the difference % =			$24.44	"/"By	$107.18
	So , the difference % =			0.23
	So, the IRR =			18.23%
	Answer = IRR =		18.23%