Question

Yelp! Company is considering investing in Project G or Project H. The projects generate the following end of year cash flows:

	Year 0	Year 1	Year 2
Project G	-250	246	236
Project H	-200	180	100

The MARR is 10% per year, compounded annually. Compute the Internal Rate of Return (IRR) of the BEST project. (note: round your answer to two decimal places and do not include spaces or percentage signs. If the answer is 1.53%, write 1.53 as your answer).

Who ever solves this can you show me what the I value is that you solve for at the end. I know that Project G is the best one, but cannot figure out what they mean by trial and error to find the percentage

Answer 1

IRR is that discount rate for which NPV = 0. It has to be found out by trial and error. Under the method, WACC is chosen arbitrarily and
the NPV is ascertained. AS the NPV is positive, the discount rate is increased to 55%. Still it is positive.
Further, NPV is worked out at 59% and then 58%. NPV is +ve for 58% and -ve for 59%.
PROJECT G:
YEAR	CASH FLOW	PVIF at 10%	PV at 10%	PVIF at 55%	PV at 55%	PVIF at 59%	PV at 59%	PVIF at 58%	PV at 58%
0	$ -250.00	1.00000	$         -250.00	1	$       -250.00	1	$ (250.00)	1	$ (250.00)
1	$            246.00	0.90909	$           223.64	0.64516	$        158.71	0.62893	$        154.72	0.63291	$             155.70
2	$            236.00	0.82645	$           195.04	0.41623	$ 98.23	0.39555	$          93.35	0.40058	$               94.54
			$           168.68		$ 6.94		$ (1.93)		$                 0.23
0 NPV is got between 58% and 59%
By simple interpolation IRR = 58%+1%*0.23/(0.23+1.93) =	58.11%
G
YEAR	CASH FLOW	PVIF at 10%	PV at 10%	PVIF at 40%	PV at 40%	PVIF at 28%	PV at 28%	PVIF at 29%	PV at 29%
0	$                -200	1.00000	$         -200.00	1	$       -200.00	1	$   (200.000)	1	$          (200.00)
1	$                  180	0.90909	$           163.64	0.71429	$        128.57	0.78125	$      140.625	0.77519	$             139.53
2	$                  100	0.82645	$             82.64	0.51020	$           51.02	0.61035	$        61.035	0.60093	$               60.09
			$             46.28		$         -20.41		$             1.66		$               (0.37)
Similarly IRR of Project H = 28%+1%*1.66/(1.66+0.37) =	28.82%
CHOICE:
Project G is the best one as it has the higher IRR among the two projects.