Question

Problem 1-10 points Determine the rate of return for the following cash flow. Year Net cash flow -80000 -9000 40000 70000

Answer 1

Approximate IRR is computed using interpolation:

IRR = RL + [NPVL / (NPVL - NPVH)] x (RH - RL) where

RL: Lower discount rate = 5% (assumed)

RH: Higher discount rate = 10% (assumed)

NPVL: NPV at 5%

NPVH: NPV at 10%

Year	Cash Flow ($)	PV Factor at 5%	Discounted Cash Flow ($)	PV Factor at 10%	Discounted Cash Flow ($)
	(A)	(B)	(A) x (B)	(C)	(A) x (C)
1	-80,000	0.9524	-76,190	0.9091	-72,727
2	-9,000	0.9070	-8,163	0.8264	-7,438
3	40,000	0.8638	34,554	0.7513	30,053
4	70,000	0.8227	57,589	0.6830	47,811
		NPVL ($) =	7,789	NPVH ($) =	-2,302

So:

IRR = 5% + [7,789 / (7,789 + 2,302)] x (10 - 5)%

= 5% + (7,789 / 10,091) x 5%

= 5% + (0.772 x 5%)

= 5% + 3.86%

= 8.86%