Question

include cash flow diagram

An internet company projects the following cash flows shown in the table below (in milions). Using a Net Present Worth Balancing Equation and a manual iteration process compute the Rate of Return. Cash Flow (millions) 40 Year 0 1-3 4 -28 +15 +30 6-10

Answer 1

Let r be the internal rate of return (IRR)

for (IRR) NPV=0

10 NPV-CFt/(1+r)

Where

CFt= Cash flow in t year

r = internal rate of return

NPV=-40/(1+r)^0-28/(1+r)^1-28/(1+r)^2-28/(1+r)^3 + 5/(1+r)^4+15/(1+r)^15+30/(1+r)^6+30/(1+r)^7+ 30/(1+r)^8+ 30/(1+r)^9+ 30/(1+r)^10 =0

Solving for r we get r=5.20%