Question

22. Use the following table,

	Present Value of an Annuity of 1
Period	8%	9%	10%
1	0.926	0.917	0.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $329030 and is expected to generate cash inflows of $130000 each year for three years. The approximate internal rate of return on this project is

a) the IRR on this project cannot be approximated.

b) 10%.

c) 9%.

d) 8%.

Answer 1

Correct answer is c) 9%

We can see for 9% interest rate Total discounted cash inflows almost equal to the cash outflow $329030 hence desired IRR of the project is 9%

A E F G - H Discounted cash flows Total cash inflows 1 Year IRR Year IRR 2. 10% 3 1 1 323290.7588 4 2 2 118181.8182 107438.0165 97670.92412 5 B C D Discounted cash flows Total cash inflows 8% 120370.3704 335022.6083 111454.0466 103198.1913 Discounted cash flows Total cash inflows 0.09 119266.055 329068.3066 109418.3991 100383.8524 3 3 IRR 6 Year 7 8 1 9 2 10 3

Formula

А B E F 1 Discounted cash flows Total cash inflows Year Total cash inflows IRR 0.08 Year 2 31 4 2 =SUM(C3:05) G H IRR Discounted cash flows 0.1 =130000/((1+$G$2)^F3) =130000/((1+$G$2)^F4) =130000/((1+$G$2)^F5) 1 =SUM(H3:H5) =130000/((1+$B$2)^A3) =130000/((1+$B$2)^A4) =130000/((1+$B$2)^A5) Discounted cash flows 2 5 3 3 Total cash inflows IRR 0.09 6 Year 7 8 1 92 10 3 =SUM(C8:C10) =130000/((1+$B$7)^A8) =130000/((1+$B$7)^29) =130000/((1+$B$7) A10)