D Question 13 5 p llinois Tool Works is considering a projec

D Question 13 5 p llinois Tool Works is considering a project that has an initial cash outflow of $1.2 million and expected cash inflows of $318,000 per year for the next 5 years. What i the project\'s IRR? Your answer should be between 7.60 and 13.42, rounded to 2 decimal places, with no special characters

Solution

The answer is 10.18%

Cash flow at Year 0 = 1200000

Cash flow 1-5 year = 318000

IRR is the rate at which NPV of the project become zero

318000 x PVAF@ r %, 5 year - 1200000 = 0

PVAF @ r % , 5 year = 3.773

Find out the rate corresponding to the figure 3.773 from your presest value annuity table

So we will get at 10 % it is 3.791

NPV @ 10% = 5538

Then find out NPV @ 11% ( PVAF = 3.696) = -24672

IRR = 10% + (5538/ 5538+24672) x 1%    , (This 1% = 11%-10%)

= 10.18

For calculating IRR we have get one initial guess rate. Find out the nearest one positive NPV and and negative NPV. And apply the formula given above to calculate IRR