Filter Corp. has a project available with the following cash flows:
Year Cash Flow
0 −$13,500
1 6,400
2 7,700
3 4,500
4 4,100
What is the project's IRR?
IRR is the rate at which NPV is zero.
Lets compute NPV at 27% as shown below:
= - $ 13,500 + $ 6,400 / 1.27 + $ 7,700 / 1.272 + $ 4,500 / 1.273 + $ 4,100 / 1.274
= $ 86.28071835
Lets compute NPV at 28% as shown below:
= - $ 13,500 + $ 6,400 / 1.28 + $ 7,700 / 1.282 + $ 4,500 / 1.283 + $ 4,100 / 1.284
= - $ 127.1567345
It means the IRR lies between 27% and 28% since the initial investment of $ 13,500 is recovered between them and same is shown below:
= Lower rate + [ (Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] x (Higher rate - lower rate)
= 27 + [ ($ 86.28071835) / ($ 86.28071835 - (- $ 127.1567345) ] x (28 - 27)
= 27.40% Approximately
Feel free to ask in case of any query relating to this question
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