Question

Compute the internal rate of return for the cash flows of the following two projects. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

    

Year	Project A		Project B
0	–$	11,800	–$	9,400
1		4,600		2,500
2		5,400		6,900
3		4,200		3,800

Project A =

Project B =

Answer 1

Ans: IRR is calculated by trial and error method

Project A : For project A cost of capital for 10% is tried first

Present value at 10%

Present value at 10%
Present value factor (1/(1+rate)^n	Present value factor	Cash flows	Present value of cash flows
1/(1.1)	0.909090909	4600	4181.818182
1/(1.1)^2	0.826446281	5400	4462.809917
1/(1.1)^3	0.751314801	4200	3155.522164
		Total Cash Inflow	11800.15026
			11800

Since total cash inflow is tying to cash outflow of 11,800. IRR = 10%

PRoject : B It is tried for 10% and 20%

Present value at 10%
Present value factor (1/(1+rate)^n	Present value factor	Cash flows	Present value of cash flows
1/(1.1)	0.909090909	2500	2272.727273
1/(1.1)^2	0.826446281	6900	5702.479339
1/(1.1)^3	0.751314801	3800	2854.996243

Total cash inflow = 10,830.

Total cash outflow = 9400

Difference = 1430 for 10%

Present value at 20%
Present value factor (1/(1+rate)^n	Present value factor	Cash flows	Present value of cash flows
1/(1.20)	0.833333333	2500	2083.3
1/(1.20)^2	0.694444444	6900	4791.7
1/(1.20)^3	0.578703704	3800	2199.1
		Total Cash Inflow	9074.1
		Total Cash outflow	9400
		Difference at 20%	-325.9

Total difference = 1430.20 + 325.9

= 1756.1 for 10% difference

at 10% we got inflow of 9400, difference b/w inflow and outflow is 1430

for 1756.1 change is 10

for 1430 change ?

10/1756.1*1430

= 8.144

IRR = 10% + 8.144 %

= 18.144%