Question

A firm invests $100,000 in a project today. It receives $15,000 a year from now, $20,000 two years from now, and $95,000 three years from now and nothing more. What is the IRR of the project?

Where aX:aY are cells aX to aY which have cash flows entered into them. The initial investment is a negative cash flow so it should have a negative sign.

Z is a "guess" IRR, usually you can set to 0.1 (which is 10%).

Answer 1

IRR is a rate at which all the present values of cash inflows will be equal to present value of outflows. It can be done with the below formula by assuming two different rates-

IRR = Rate 1 + ((Net Present Value using Rate1 x (Rate 2 - Rate 1)) / (Net Present Value using Rate1 - Net Present Value using Rate2))

However, it can easily be calculated in excel as below-

(a ) Year	(b) Payment $	( c) PV factor @10.657%(=1/(1+0.10657)^a)	(d) Present Value (c*b) $	(e ) Guess
0	-100000	1.000	(100,000)	0.10657
1	15000	0.904	13,555
2	20000	0.817	16,333
3	95000	0.738	70,111
Total of PV $			(0)

Here you can change column e "Guess" until you get 0 in "Total of PV $"(It is the total of column D). Here IRR is 0.10657 or 10.657%.