Question

Given the popularity of IRR, you have decided to use it to evaluate a project. The cashflows from the project will be $40k, $42k and $28k in years 1 through 3. After that the project will yield cashflows of $20k per year, forever. The project’s initial cost is $450k and the firm’s opportunity cost/hurdle rate is 7%. Write down the equation used to solve for the IRR (do not solve for the actual IRR). Does the project have conventional cashflows?

Answer 1

Solution :-

IRR is the Internal Rate of return and It is the rate of retrun at which the Present value of cash inflows is equal to the present value of cash outflows

The Equation for Solving this IRR is

Present value of Cash inflow = PV of CF of Yr 1 + PV of CF of Yr 2 + PV of CF of Yr 3 + PV of Forever Cashflows

and PV of Forever Cashflows at year 3 =

Now to know whether the Project have Conventional Cashflows we need to find NPV

Year	Particular	Amount	PVF@ 7%	PV of Cashflows
0	Outflow	-450	1	-450.000
1	Inflow	40	0.935	37.383
2	Inflow	42	0.873	36.684
3	Inflow	28	0.816	22.856
3	Terminal Value	285.714	0.816	233.225
		NPV	=	-119.851
	Terminal Value =		CF / Discount Rate
			20k / 7%		=	285.7143

As the NPV is negative that is -119.85K therefore Project Does not have conventional Cashflows