Question

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 = -101,000 Year 1 cash flow = 33,000 Year 2 cash flow = 40,000 Year 3 cash flow = 38,000 Year 4 cash flow = 42,000

Answer 1

Let irr be x%
At irr,present value of inflows=present value of outflows.

101000=33000/1.0x+40000/1.0x^2+38000/1.0x^3+42000/1.0x^4

Hence x=irr=18.24%(Approx).