Question

Question 10 5 pts What is Project B's Internal Rate of Return (IRR) with a WACC of 7.75%? YEAR CASH FLOWS Project A Project B 0 -$1050 -$1050 1 675 360 1 2 650 360 3 360 4 360 HTML Editora BTA - A - IEE 32. * DoPNV GODT 12pt Paragraph

Answer 1

Solution:

IRR is the rate at which NPV of the project is zero.

NPV=Present value of cash inflows-Initial cash outflows

NPV @7.75%

Present value of cash inflows=$360*[email protected] for 4 years

=$360*3.3306=$1199.02

NPV=$1199.02-$1050=$149.02

Since the NPV @7.75 is positive ,hence IRR must be higher than 7.75%.Lets calculate the NPV @15%

Present value of cash inflows=$360*PVAF@15% for 4 years

=$360*2.8550=$1027.80

NPV=$1027.80-$1050=-$22.20

Now,IRR can be calculated using following formula:

IRR=Lower rate+[NPV at Lower rate/Present value of cash inflows at(lower rate-Higher rate)]*(Higher rate-lower rate)

=7.75%+[$149.02/($1199.02-$1027.80)]*15-7.75

=7.75%+[(149.02/171.22)]*7.25

=14.05%