1)Consider the following cash flows: Year Cash Flow 0 –$ 33,500 1 13,500 2 18,20

Question

1)Consider the following cash flows:

Year Cash Flow
0 –$ 33,500
1 13,500
2 18,200
3 10,900

Required:

What is the IRR of the above set of cash flows? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

2)Your coin collection contains 57 1952 silver dollars.

Required:

If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2055, assuming they appreciate at a 6.4 percent annual rate? (Do not include the dollar sign ($). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Calculation of IRR:

At IRR as discount rate , NPV of the cash flows should be zero.

Let's calculate NPV at 13% discount rate:

Year

Cash Flows (CF)

PVF (13%)

PV

0

$       (33,500.00)

1

$ (33,500.00)

1

$         13,500.00

0.884955752

$   11,946.90

2

$         18,200.00

0.783146683

$   14,253.27

3

$         10,900.00

0.693050162

$      7,554.25

NPV

$         254.42

At 13% discount rate NPV is positive,

we need a discount rate that makes NPV 0,

so we should take 14% as discount rate

Let's calculate NPV at 14% discount rate:

Year

Cash Flows (CF)

PVF (14%)

PV

0

$      (33,500.00)

1

$ (33,500.00)

1

$         13,500.00

0.877192982

$   11,842.11

2

$         18,200.00

0.769467528

$   14,004.31

3

$         10,900.00

0.674971516

$      7,357.19

NPV

$       (296.40)

Now we have got negative NPV at 14%,

it means IRR is in between 13% and 14%

Lets calculate exact IRR:

Discount rate

NPV

13%

$         254.42

14%

$      (296.40)

Difference

1%

$         550.82

IRR = 13% + 1% * (254.42 / 550.82) =

13.46%

Hence IRR of the project is 13.46%

Calculation of IRR:

At IRR as discount rate , NPV of the cash flows should be zero.

Let's calculate NPV at 13% discount rate:

Year

Cash Flows (CF)

PVF (13%)

PV

0

$       (33,500.00)

1

$ (33,500.00)

1

$         13,500.00

0.884955752

$   11,946.90

2

$         18,200.00

0.783146683

$   14,253.27

3

$         10,900.00

0.693050162

$      7,554.25

NPV

$         254.42

At 13% discount rate NPV is positive,

we need a discount rate that makes NPV 0,

so we should take 14% as discount rate

Let's calculate NPV at 14% discount rate:

Year

Cash Flows (CF)

PVF (14%)

PV

0

$      (33,500.00)

1

$ (33,500.00)

1

$         13,500.00

0.877192982

$   11,842.11

2

$         18,200.00

0.769467528

$   14,004.31

3

$         10,900.00

0.674971516

$      7,357.19

NPV

$       (296.40)

Now we have got negative NPV at 14%,

it means IRR is in between 13% and 14%

Lets calculate exact IRR:

Discount rate

NPV

13%

$         254.42

14%

$      (296.40)

Difference

1%

$         550.82

IRR = 13% + 1% * (254.42 / 550.82) =

13.46%

Hence IRR of the project is 13.46%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.