Question

The following data pertain to an investment project: Investment required $1,869,420 Annual savings $330,900 Life of project 10 years The internal rate of return for this project is _______. You must enter your answer in the following format: xx%

Answer 1

IRR refers to the rate where cash outflows will be equal to PV of all inflows.

IRR can be calculated with help of Excel function IRR as below:

Function =  IRR(Value 0,value 1,value 2.....Value n)

As with given cash flows IRR will be : 12.00312%

Period	Cash flows
0	-18,69,420.00
1	3,30,900.00
2	3,30,900.00
3	3,30,900.00
4	3,30,900.00
5	3,30,900.00
6	3,30,900.00
7	3,30,900.00
8	3,30,900.00
9	3,30,900.00
10	3,30,900.00

Same be can be checked as below :

Period	Cash flows	PV OF Cash flows @ 12.00312% Cash Flow / (1+12.00312%)^Period
0	-18,69,420.00	-18,69,420.00
1	3,30,900.00	₹ 2,95,438.20
2	3,30,900.00	₹ 2,63,776.76
3	3,30,900.00	₹ 2,35,508.40
4	3,30,900.00	₹ 2,10,269.50
5	3,30,900.00	₹ 1,87,735.40
6	3,30,900.00	₹ 1,67,616.22
7	3,30,900.00	₹ 1,49,653.17
8	3,30,900.00	₹ 1,33,615.18
9	3,30,900.00	₹ 1,19,295.94
10	3,30,900.00	₹ 1,06,511.27
Total		0.0