Question

Consider the following cash flow profile and assume MARR is 10%/year.

EOY NCF

0 $-95

1 $20

2 $20

3 $50

4 $-50

5 $50

6 $20

Determine the IRR for this project.

Answer 1

The cash flows are given as

EOY	Cash Flow
0	-95
1	20
2	20
3	50
4	-50
5	50
6	20

MARR = 10%

Calculating IRR using the Trial and Error Method

Let the rate of interest rate is 4%. Calculate the PW of the cash flows at 4%.

EOY	Cash Flow	Discounting Factor (1 + i) – N	Discounted Cash Flow
0	-95	1.000000	-95.00
1	20	0.961538	19.23
2	20	0.924556	18.49
3	50	0.888996	44.45
4	-50	0.854804	-42.74
5	50	0.821927	41.10
6	20	0.790315	15.81
Present Worth	1.33

The PW at 4% is positive. Increase the rate of interest to get a negative PW. Increase the rate of interest to 5%. Calculate PW at 5%.

EOY	Cash Flow	Discounting Factor (1 + i) – N	Discounted Cash Flow
0	-95	1.000000	-95.00
1	20	0.952381	19.05
2	20	0.907029	18.14
3	50	0.863838	43.19
4	-50	0.822702	-41.14
5	50	0.783526	39.18
6	20	0.746215	14.92
Present Worth	-1.65

Using interpolation

IRR = 4% + [1.33 – 0 ÷ 1.33 – (-1.65)] * 1%

IRR = 4.44%

As the IRR is less than MARR, the project is to be rejected.