A colleague asks for your help in finding the discount rate where the NPV=0 for a set of cash flows. You quickly recall that this is the IRR for a project. Answer in %, rounding to 2 decimals.
Year 0 cash flow = -118,000
Year 1 cash flow = 43,000
Year 2 cash flow = 37,000
Year 3 cash flow = 45,000
Year 4 cash flow = 39,000
Calculation of IRR: | ||||
Particulars | Time | PVf @10% | Amount | PV |
Cash Outflows | - | 1.00 | -1,18,000.00 | -1,18,000.00 |
PV of Cash outflows = PVCO | -1,18,000.00 | |||
Cash inflows | 1.00 | 0.9091 | 43,000.00 | 39,090.91 |
Cash inflows | 2.00 | 0.8264 | 37,000.00 | 30,578.51 |
Cash inflows | 3.00 | 0.7513 | 45,000.00 | 33,809.17 |
Cash inflows | 4.00 | 0.6830 | 39,000.00 | 26,637.52 |
PV of Cash Inflows =PVCI | 1,30,116.11 | |||
NPV= PVCI - PVCO | 12,116.11 | |||
Statement showing NPV | ||||
Particulars | Time | PVf @15% | Amount | PV |
Cash Outflows | - | 1.00 | -1,18,000.00 | -1,18,000.00 |
PV of Cash outflows = PVCO | -1,18,000.00 | |||
Cash inflows | 1.00 | 0.8696 | 43,000.00 | 37,391.30 |
Cash inflows | 2.00 | 0.7561 | 37,000.00 | 27,977.32 |
Cash inflows | 3.00 | 0.6575 | 45,000.00 | 29,588.23 |
Cash inflows | 4.00 | 0.5718 | 39,000.00 | 22,298.38 |
PV of Cash Inflows =PVCI | 1,17,255.23 | |||
NPV= PVCI - PVCO | -744.77 | |||
Internal rate of return= | Lower rate+ | (Lower rate NPV) | *(Higher rate- lower rate) | |
(lowe rate NPV- Higher rate NPV) | ||||
10%+ | 12116.11 | *(15%-10%) | ||
(12116.11+744.77) | ||||
10%+ 4.71% | ||||
Internal Rate of return is 14.71% |
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