Question

We know the following data of an investment that the company has made:

• An initial disbursement of € 2,000,000 and generates the collections and payments in the successive years of its duration that are shown in the following table:

Years	Collection (€)	Payments (€)
1 Year 2 Year 3 Year 4 Year	4.500.000 5.500.000 6.000.000 4.000.000	3.800.000 4.500.000 5.000.000 3.200.000

Calculate the IRR of the previous project. Justify for what type of discount this investment will be made.

Answer 1

Calculation of Net Cash Flow:

Year	Collection	Payment	Net cash flow
1	45,00,000	38,00,000	7,00,000
2	55,00,000	45,00,000	10,00,000
3	60,00,000	50,00,000	10,00,000
4	40,00,000	32,00,000	8,00,000

At IRR, NPV is equal to zero.

0 = -2,000,000 + 700,000 / (1 + IRR) + 1,000,000 / (1 + IRR)^2 + 1,000,000 / (1 + IRR)^3 + 800,000 / (1 + IRR)^4

By trial and error, we can see that IRR = 26.08%

Discount rate of less than 26.08% will be made for the investment to be feasible. For discount rate of less than 26.08%, NPV will be more than 0.