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What is the internal rate of return (IRR) of a project costing $3,000 (at year 0);...

  1. What is the internal rate of return (IRR) of a project costing $3,000 (at year 0); having after-tax cash flows of $1,500 in each of the two years of its two-year life; and a salvage value of $600 at the end of the second year in addition to the $1,500 cash flow?

    13.21%

    17.23%

    16.06%

    12.32%

Solutions

Expert Solution

Ans 12.32%

Year Project Cash Flows (i) DF@ 12% DF@ 12% (ii) PV of Project ( (i) * (ii) ) DF@ 24% (iii) PV of Project ( (i) * (iii) )
0 -3000 1 1                                   (3,000) 1                     (3,000)
1 1500 1/((1+12%)^1) 0.892857                                     1,339 0.806                        1,210
2 2100 1/((1+12%)^2) 0.797194                                     1,674 0.650                        1,366
NPV                                           13 NPV                         (425)
IRR = Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
12% + 13 / (13 + 425)*12%
12.32%

jeff jeffy answered 2 years ago
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