Question

For the project below, please answer the following questions:

(a) What are the NPVs for 11%, 13% and 15% respectively?

(b) Based on your results above; what is the approximate IRR (and why)?

(c) Calculate the exact IRR with Excel (to 1 decimal place)

Year (n)	0	1	2	3	4
Undiscounted cash flow	-$600,000	$200,000	$200,000	$200,000	$200,000
DCF @ 11%
∑DCF @11%
DCF @ 13%
∑DCF @13%
DCF @ 15%
∑DCF @15%

Answer 1

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Part a
Year (n)	-	1	2	3	4
Undiscounted cash flow	$        -600,000	$                         200,000	$     200,000	$     200,000	$     200,000
PV	1.0000	0.9009	0.8116	0.7312	0.6587
DCF @ 11%	-600,000	180,180	162,324	146,238	131,746
∑DCF @11%					$       20,489
PV	1.0000	0.8850	0.7831	0.6931	0.6133
DCF @ 13%	-600,000	176,991	156,629	138,610	122,664
∑DCF @13%					$        -5,106
PV	1.0000	0.8696	0.7561	0.6575	0.5718
DCF @ 15%	-600,000	173,913	151,229	131,503	114,351
∑DCF @15%					$      -29,004
Part b	12%
Since zero is lying between -5,106 and 20,489 and hence IRR will be between 11% and 13%
Part c
	Year (n)	Undiscounted cash flow
	-	$                       -600,000
	1.00	$                         200,000
	2.00	$                         200,000
	3.00	$                         200,000
	4.00	$                         200,000
		IRR(sum of cash flow)
	IRR	12.59%