Question

Project L costs $51,295.68, its expected cash inflows are $11,000 per year for 9 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places.

Answer 1

Year 0 cash flow
Cost of project............-51295.68
Year 1-9 Net cash flows...........11000
number of years (n) =9

Calculation of IRR

IRR is that rate (i) at which NPV is 0.

So we will assume discount rates and calculate NPV at different rates. Then by using interpolation formula we will calculate IRR

NPV= -Cost + Present value of cash flows present value of cash flows = P*(1-(1/1+i)^n))/i

0 = -51295.68+(110000*(1-(1/(1+i)^9))/i

Assume i is 15.5%

NPV = -51295.68+(11000*(1-(1/(1+15.5%)^9))/15.5%)

=271.1060152

Assume is 16%

NPV = -51295.68+(11000*(1-(1/(1+16%)^9))/16%)

=-623.6973749

IRR = Lower rate + (higher rate - lower rate)*(NPV at lower rate - 0)/(NPV at lower rate - NPV at higher rate)

15.5% +((16%-15.5%)*(271.1060152-0) /(271.1060152-(-623.6973749))

0.1565148915 or 15.65%

so IRR of project is 15.65%