Question

Calculating IRR What is the IRR of the following set of cash flows? Year Cash Flow -$19.400 10,400 9,320 6,900

Answer 1

Given in the problem
Investment & Cash Flows
Required for IRR Calculation
Cost of Capital
Assumption
Since cost of capital is not mentioned , lets consider below 3 Percentages
Cost of capital also called as Annuity rate at which cash flows are discounted
8%
10%
12%
	Cash Flows	Discounted Cash Flows
Year		8%	10%	12%
Capital Amount invested	-19400	-19400	-19400	-19400
1	10400	9,630	8,754	7,816
2	9320	7,990	6,604	5,264
3	6900	5,477	4,115	2,929
Net Cash Flow ( Investment + Discounted cash Flow)		3,697	73	-3,390
Total Cash Flow ( Discounted cash Flow)		23,097	19,473	16,010
IRR ( Net Cash Flow/ Total Discounted cash flow)	19%	16%	0%	-21%
Answer Recommenadation
1) IRR at no discounting rate is 19%
2) Looking at options , 8% annuity rate provides most sensible answer . Hence the IRR 16%