Question

A firm is planning an investment in a project. The initial investment is 250,000. The project returns $100,000 cash at the end of one year. At the end of second year the project returns cash of amount $F. These are only cash flows from the project. If the IRR for the project is 10%, what is the amount $F?

Answer 1

Solution :
	$F = $192,500.00
	At the end of second year the project returns cash of amount $F
Working Notes:
	At IRR discount rate NPV of the project will be Zero
	NPV = -Initial investment + Cash flow of year 1/(1+IRR)^1 + Cash flow of year 2/(1+IRR)^2
	here IRR = 10% =0.10
	Initial investment = 250,000
	Cash flow of year 1=$100,000
	Cash flow of year 2=$F= ??
	At IRR NPV = 0
	NPV = -Initial investment + Cash flow of year 1/(1+IRR)^1 + Cash flow of year 2/(1+IRR)^2
	0= -250000 + 100000/(1+0.10)^1 + $F/(1+ 0.10)^2
	0= -250000 + 90,909.090909 + $F/1.21
	$F = (250,000 - 90,909.090909) x 1.21
	$F = 192,500
Lets Check it
	NPV
	NPV = -Initial investment + Cash flow of year 1/(1+IRR)^1 + Cash flow of year 2/(1+IRR)^2
	0= -250000 + 100000/(1+0.10)^1 + 192,500/(1+ 0.10)^2
	0= -250000 +250,000
	0=0
Please feel free to ask if anything about above solution in comment section of the question.