Question

What is the internal rate of return (to the nearest one-half percent) on an investment costing $500,000 and having expected future after-tax net cash flows of:

Year	Net Cash Flow ($)
1	100,000
2	150,000
3	150,000
4	300,000	(includes salvage)

hint start at 11%

Answer 1

The internal rate of return denotes the rate at which the NPV is zero.

The internal rate of return is computed as shown below:

Lets compute the NPV at 12%:

= - $ 500,000 + $ 100,000 / 1.12 + $ 150,000 / 1.12² + $ 150,000 / 1.12³ + $ 300,000 / 1.12⁴

= $ 6,287.256612

Lets compute the NPV at 13%:

= - $ 500,000 + $ 100,000 / 1.13 + $ 150,000 / 1.13² + $ 150,000 / 1.13³ + $ 300,000 / 1.13⁴

= - $ 6,079.279627

So, the IRR will be:

= Lower rate + Lower rate NPV / [ ( Lower rate NPV - Higher rate NPV ) ] x ( Higher rate NPV - Lower rate NPV)

= 12% + $ 6,287.256612 / [ ( $ 6,287.256612 - ( - $ 6,079.279627 ) ] x (13 - 12)

= 12% + 0.50

= 12.50% Approximately

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