Lepton Industries has three potential projects, all with an initial cost of $210

Question

Lepton Industries has three potential projects, all with an initial cost of $2100000. Given the discount rates and the future cash flows of each project, what are the IRRs of the three projects for Lepton Industries?

18%

What is the IRR for Project Q?

What is the IRR for Project R?

What is the IRR for Project S?

Cash Flow Project Q Project R Project S Year 1 $500,000 $700,000 $1,100,000 Year 2 $500,000 $700,000 $900,000 Year 3 $500,000 $700,000 $700,000 Year 4 $500,000 $700,000 $500,000 Year 5 $500,000 $700,000 $300,000 Discount Rate 8% 11%

18%

Explanation / Answer

IRR is the discount rate at which the Net Present Value of the project is 0, that is, the present value of cash inflows is equal to the present value of cash outflows. IRR can be calculated using the IRR function of excel.

Cash Flow Project Q Project R Project S Year 0 ($2,100,000) ($2,100,000) ($2,100,000) Year 1 $500,000 $700,000 $1,100,000 Year 2 $500,000 $700,000 $900,000 Year 3 $500,000 $700,000 $700,000 Year 4 $500,000 $700,000 $500,000 Year 5 $500,000 $700,000 $300,000 IRR 6.11% 19.86% 25.50%

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