Question

8. Given the following cash flows, what equation would a financial manager solve to determine the IRR? yr0 = -1,050,000 yrl = 220,000 yr2 = 400,000 yr3 = 650,000 yr4 = 180,000 9. If a project has a year 0 cash flow of -9,350, a year 1 cash flow of zero, a year two cash flow of “X”, and no other cash flows, how would you calculate the IRR of this investment in terms of “X”?

Answer 1

8. The calculation of IRR is dependent upon rate at which the outflows of cash is equal to the inflows of cash.

So,

1050000= (220000/(1+r))+ (400000/(1+r)^2)

+ (650000/(1+r)^3)+ (180000/1+r)^4)

So the value of r will be the IRR which is 12.296%

9.We will calculate IRR by equating the cash outflows with cash inflows and directly discounting second year inflows since first year inflows are zero. .

9350 ={ X/ (1+r)(1+r)}

So, X = 9350(1+r)(1+r)

We will find X in such situations.