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

Internal rate of return is the rate at which present value of all future cash flows is equals to the Initial cost of the project. At IRR, NPV of Project would be Zero(0).

In case of uneven cash flow firstly then leveled perpetual cash flow , as our case,We can calculate IRR with following equation -

where,

r = IRR

CF = Cash Flows

putting the values -

Solve the equation to get value of r i.e Internal rate of return (IRR)

Conventional Cash flows is a series of cash flows where direction of cash flow change once only. In above case, there is cash out flow initially after that end of every next year there is cash inflow. Thus, it is a Conventional Cash flows.