Question

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

   

Year	Cash Flow
0	–$	27,100
1		11,100
2		14,100
3		10,100

  

1.If the required return is 15 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR

%

  

2. Should the firm accept the project?

Yes No

Answer 1

We can calculate Internal Rate of retuen (IRR) through Ms Excel and also manually

lets do it both ways

manually

to find IRR of project the formula that we should work is

NPV= - INVESTMENT + C₁/(1+R)¹ + C₂/(1+R)² + C₃/(1+R)^{3 ....................................}

^{Here NPV= Net present value which should be 0 while calculating IRR for every problem.}

C = cash flows in their respective years.

R= IRR

so we have to find the R by trail and error method whcich is tedious but no other go.

so letz solve it

= -27100+ 11100/(1+R)¹+ 14100/(1+R)²+10100/(1+R)³

=By solving R through trail and error method

lets start assuming IRR (R) to be 10%

substitute R with 10% (checking If NPV is 0 at 10%. If so then we can say that IRR of the project is 10%)

then the NPV(0)= 2232.081, Which does not hold our calculation as the result is not equal to zero and it is 2232.081

Now assume R to be 15%

the value comes to -145.286 which is also not eqaul to zero

but we had got the hint that the answer wold be between 10% and 15%

so lets try with R as 14%

gives u 303.54 which is also not equal to zero.

try with numbers between 14% and 155

so lets try 14.5% = 77.56

lets try 14.6% (as 14.5% is also positive but near to ) = 32.74

try 14.65%= 10.379

try 14.67% = 1.4

try 14.673% =0.1

so we can say that irr is aprox 14.673%

EXCEL

0	-27100
1	11100
2	14100
3	10100
IRR	14.67%

.Type the cash flows in this manner

now type the formula =IRR(select all cash flows from 0 to 3)

press enter

irr would be 14.67%

2) project should not be accepted as it is 0.33% less than the required rate of retun.

the project is producing the cashflows which are generating return which is short of 0.33%