Question

Calculate the IRR for the following cash flows. You must show trial-and-error methodology and use interpolation to find the IRR to 2 decimal points to get credit.

Year 0 1   2 3 4 5 6 7 8

NetCash -35,700 +8,000 +8,000 +8000 +8,000 +8,000 +8,000 +8,000 +2,000

Flow, $ -2,000

                    

Answer 1

Asumme discount rate @ 10% and 15%.

second multiply cash flows with discount rate value to find present value of cash flows.

compare net present value of cashflows with inital investment amount.

if it is same then that will be the IRR or if not procceed with different discount rate.

here @ 15% discount rate the present value of cash flows is approximate same as inital inveatment.

hence, IRR is 15%. ( with trial and error method)

note ( as interest increse net value decrease)

so when you use t & Eh method procced with random interest and compare with it wisely.

for two decimal IRR

IRR= lower discount rate + [ npv at lower rate *( higher rate - lower rate ) / ( npv at lower rate - npv at higher rate