Question

In: Finance

Given the following annual net cash flows, determine the IRR to the nearest whole percent of...

Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800.

Year Net Cash Flow
1 $1,000
2 $750
3 $500

A) 14%  
B) 12%
C) 8%
D) 25%

Solutions

Expert Solution

For the purpose of calculating IRR, it is essential to calculate the PV factor. The PV factor is as follows:

Average annual cash outflow = $1,000 +$750 +$500 = $750

   Initial Outlay / Average annual cash outflow

= $1800 / $750

= 2.4

12% = 0.89286 .79719 .71178 = 2.40183

13% = 088496 .78315 .69305 = 2.36116

The number lies between 12% and 13%

Net cash Inflows : $1,000        $750         $500

PV                       0.89286    .79719     .71178

PV@12%             $892.6      $597.89   $355.89   = $1846.38

Net cash Inflows : $1,000        $750         $500

PV                       088496   .78315       .69305

PV@13%             $884.96      $587.36 $346.52 = $1818.84

IRR will be calculated through Interpolation.

LR + PVLR - Desired Value / PVLR - PVHR * (HR - LR)

= 12 + 1846.38 - 1800 / 1846.38 - 1818.84 * (13 - 12)

= 12 + 46.38 / 27.54

= 12 + 1.68

= 13.68 %

Hence, the correct answer is 'A' 14%

Here,

LR =Lower rate

PVLR = Present Value of lower rate

HR = Higher Rate

Hence, the correct answer is 'A' 14%

jeff jeffy answered 7 months ago
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