Project A costs 45750 its expected net cash inflows are 1000

Project A costs $45,750, its expected net cash inflows are $10,000 per year for 7 years, and its WACC is 10 percent. What is the project\'s IRR?

Solution

IRR is the rate at which net present value is zero. Discount rate and present value of cash inflows have advese relation.It means if discount rate increases, present value of cash inflows decreases and vice versa. a. Calculation of Net Present Value at 10% Year Cash flows Discount factor Present Value 0 $    -45,750           1.0000    -45,750.00 1          10,000           0.9091        9,090.91 2          10,000           0.8264        8,264.46 3          10,000           0.7513        7,513.15 4          10,000           0.6830        6,830.13 5          10,000           0.6209        6,209.21 6          10,000           0.5645        5,644.74 7          10,000           0.5132        5,131.58 Net Present Value        2,934.19 b. Calculation of Net Present Value at 20% Year Cash flows Discount factor Present Value 0 $    -45,750           1.0000    -45,750.00 1          10,000           0.8333        8,333.33 2          10,000           0.6944        6,944.44 3          10,000           0.5787        5,787.04 4          10,000           0.4823        4,822.53 5          10,000           0.4019        4,018.78 6          10,000           0.3349        3,348.98 7          10,000           0.2791        2,790.82 Net Present Value       -9,704.08 IRR = L+(H-L)*(A/(A-B)) Where, = 10%+(10%*(2934.19/12638.27)) L 10% = 12.32% H 20% H-L 10% A     2,934.19 B -9,704.08 A-B 12,638.27 Thus, Project\'S IRR is 12.32%