Question

A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project.

Answer 1

Answer:
a) Calculation of IRR
Formula =	Lower rate +	NPV at lower rate	x (Higher rate - Lower rate)
		NPV at lower rate - NPV at higher rate
NPV =	Present value of Cash inflows - Initial cost
Initial cost =	60000.00
Present value at lower rate   =	10.00%			Present value at higher rate   =	12%
Year	Cash Inflows	Present value factor @ 10%	Present value of cash inflows		Year	Cash Inflows	Present value factor @ 12%	Present value of cash inflows
1	16200.00	0.90909	14727.27		1	16200.00	0.89286	14464.29
2	16200.00	0.82645	13388.43		2	16200.00	0.79719	12914.54
3	16200.00	0.75131	12171.30		3	16200.00	0.71178	11530.84
4	16200.00	0.68301	11064.82		4	16200.00	0.63552	10295.39
5	16200.00	0.62092	10058.93		5	16200.00	0.56743	9192.32
Total	61410.75		Total	58397.37
NPV at Lower rate					NPV at higher rate
Present value of cash inflows	61410.75			Present value of cash inflows	58397.37
Less: Initial cost		60000.00			Less: Initial cost		60000.00
NPV		1410.75			NPV		-1602.63
IRR=	10% +	1410.7457	x (12-10)%
		3013.3712
IRR=	10% +	0.4682	*2%
IRR=	10% +	0.9363	%
IRR=	10.93%
	or 10.92%	(Answer)
b) The project should no be accpeted, as its IRR is less than the hurdle rate.