Question

A firm with a 10.5 percent cost of capital is considering a project for this year’s capital budget. The project’s expected after-tax cash flows are as follows:

Year:	0	1	2	3	4
Cash flow:	-$8,000	$3,600	$3,000	$3,900	$3,800

Calculate the project’s internal rate of return (IRR).

	a.	19.19%
	b.	27.42%
	c.	78.75%
	d.	15.63%
	e.	39.43%

Answer 1

Project
IRR is the rate at which NPV =0
IRR	0.274185847
Year	0	1	2	3	4
Cash flow stream	-8000	3600	3000	3900	3800
Discounting factor	1	1.274186	1.62355	2.068704	2.6359132
Discounted cash flows project	-8000	2825.334	1847.803	1885.238	1441.6256
NPV = Sum of discounted cash flows
NPV Project =	0.000685857
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	27.42%