Question

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year 0 1 Cash Flow -$34,000 15,000 17,000 13,000 WN- If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR I % Should the firm accept the project? Accept Reject

Answer 1

1st solving the question using Excel

using =IRR(values) function in excel, where selecting all the values from the same column.

IRR = 15.80%

So as IRR is greater than 14%, firm should accept the project.

Now solving mathematically with out excel

Let IRR be r%

equating present value of all cash flow to zero we get

-34000 + 15000/(1+r) + 17000/(1+r)^2 + 13000/(1+r)^3 = 0

=> 34*r^3 + 87*r^2 + 55*r - 11 = 0

A cubic equation can be solved using scientific calculator. Here, using interpolation technique to solve the equation. It does not give exact value but an approximate value.

We can try different r value to approximately identify the value of r.

At r = 0.155, equation gives -0.2582

and at r = 0.16, equation gives 0.1665

So r can be calculated using

r = 0.155 + (0.16-0.155)*(0.2582)/(0.1665+0.2582) = 0.158 approx

or r = 15.80% approximately

So as r is greater than 14%, the project should be accepted.