What is the IRR of the following set of cash flows? Year Cash Flow 0 –$9,875 1 5
ID: 2615968 • Letter: W
Question
What is the IRR of the following set of cash flows?
Year
Cash Flow
0
–$9,875
1
5,400
2
4,200
3
5,100
A firm evaluates all of its projects by using the NPV decision rule.
Year
Cash Flow
0
–$27,000
1
19,000
2
17,000
3
8,000
Required:
(a)
At a required return of 13 percent, what is the NPV for this project?
(b)
At a required return of 32 percent, what is the NPV for this project?
What is the IRR of the following set of cash flows?
Explanation / Answer
1.Let irr be x%
At irr,present value of inflows=present value of outflows.
9875=5400/1.0x+4200/1.0x^2+5100/1.0x^3
Hence x=irr=23.22%(Approx).
2.
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
a.Present value of inflows=19000/1.13+17000/1.13^2+8000/1.13^3
=$35672.05
NPV=Present value of inflows-Present value of outflows
=$35672.05-$27000
=$8672.05(Approx).
b.Present value of inflows=19000/1.32+17000/1.32^2+8000/1.32^3
=$27628.91
NPV=Present value of inflows-Present value of outflows
=$27628.91-$27000
=$628.91(Approx).
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