Question

25) Calculate the Internal Rate of Return based on the following data.

       Original Investment: $1,500

year	net cash flow	NPV discount 10% factor	discounted cash flow @10% calculate	NPV discount @30% facotr	discounted cash flow @30% calculate
1	$2000	.8900		.3300
2	$2000	.7800		.2200
3	$1000	.6800		.0600

Answer 1

ANSWER

Year	Net Cash Flow ($)	NPV Discount Factor @10 %	Discounted Cash Flow @ 10%	NPV Discount Factor @30 %	Discounted Cash Flow @ 30%
A	B	C	D = B x C	E	F = B x E
1	2000	0.8900	1780	0.3300	660
2	2000	0.7800	1560	0.2200	440
3	1000	0.6800	680	0.0600	60
Total			4020		1160

Internal Rate of Return or Implicit Rate of Return where Present Value of cash inflow during the given 3 years = $ 1,500

Using Interpolation method, we get

X – X1 / X2 – X1 = Y – Y1 / Y2 – Y1

X – 10 / 30 – 10 = 1500 – 4020 / 1160 – 4020

Using BODMAS we get,

X – 10/20 = -2520/-2860

X = (0.88 x 20) + 10

X = 27.62 %

Where,

X = Desired rate of IRR

X1 = 1st assumed rate

X2 = 2nd assumed rate

Y1 = Cumulative PV when, Discount factor rate is X1

Y2 = Cumulative PV when, Discount factor rate is X2

Note: - The rates given in question as

Rate	Year 2	Year 2	Year 3
10%	0.8900	0.7800	0.6800
30%	0.3300	0.2200	0.0600

Have been duly accounted in question without first authenticating the same based on applicable rate percentage.