Question

Use the table for the question(s) below. Consider the following two projects: Year 4 Project Year 0 Cash Flow -100 -73 Year 1 Cash Flow 40 30 Year 2 Cash Flow 50 30 Year 3 Cash Flow 60 30 Cash Flow N/A 30 Discount Rate 15 15 A The internal rate of return (IRR) for project A is closest to: Select one: A. 21.6% B. 23.3% C. 42.9%

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

100 = 40 / (1 + r)1 + 50 / (1 + r)2 + 60 / (1 + r)3

Using trial and error method, i.e.,after trying various values for R, lets try R as 21.6%

100 = 40 / (1 + 0.216)1 + 50 / (1 + 0.216)2 + 60 / (1 + 0.216)3

100 = 100

Therefore, IRR of project A is 21.6%