In: Finance
Calculate the IRR(s) for a 10-year project with the following cash flows: CF0 = -30, CF1 = 10 = CF2 = CF3 = CF4 = CF5 = CF6 = CF7 = CF8 = CF9, and CF10 = -65. In Excel, plot the NPV against r (= discount rate), using r = 0%, 2%, 4%, 6%, 8%, 10%, 12%, 14%, 16%, 18%, 20%, 22%, 24%, 26%, 28%, and so on until you find all IRRs on the horizontal axis. Approximately, what are IRRs?
Internal Rate of Return (IRR) is the rate at which Net Present value is equal to zero which means present value of cash inflows equals to present value of cash outflows.
Please refer to below spreadsheet for calculation and plot of NPV for various required rate of return (r) and IRRs.
Formula reference -
We can see in above plot of NPV and required rate of return, NPV curve crossed twice the x-axis where NPV value is Zero.
NPV crossed X-axis(horizontal) at approx 3.5% and 19.5%
Thus,
IRRs of above project is 3.5% and 19.5% (approximately).
Please note - to plot NPV and required rate of return, we may use "scatter with smooth lines and markers" in excel.