Question

(Calculating IRR, payback, and a missing cash flow) The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows: Year Project Cash Flow $770,000 360,000 270,000 450,000 4 If you know that the project has a regular payback of 2.6 years, what is the project's IRR? The IRR of the project is.%. (Round to two decimal places.)

Answer 1

payback period = 2.6 years

this implies initial investment is paid back in 2.6 years

=>

initial investment = 770000 + 360000 + 0.6 * 270000 = 1292000

IRR is the rate at which NPV is zero

=>

-1292000 + 770000/(1+IRR) + 360000/(1+IRR)^2 + 270000/(1+IRR)^3 + 450000/(1+IRR)^4 = 0

using excel IRR function

IRR = 18.71%