Question

A firm considers taking on a new project which will cost EUR 342 and provides cash flows of EUR 107,109,119,84 in the next 4 years. What is the internal rate of return of the project?

Answer 1

IRR is calculated as follows,

IRR=L+((NPV_L/(NPV_L-NPV_H)*(H-L))

Where,

L means Lower discount rate taken

H means Higher discount rate taken

NPV_L means NPV at Lower discount rate taken

NPV_H means NPV at Higher discount rate taken

Year	Cash flow	Discount factor @ 6%	Discounted CF @ 6%	Discount factor @10%	Discounted CF @ 10%
0	(342)	1.000	(342.00)	1.000	(342.00)
1	107	0.934	99.938	0.909	97.263
2	109	0.890	97.010	0.826	90.034
3	119	0.839	99.841	0.751	89.369
4	84	0.792	66.528	0.683	57.372
NPV @ 6%			21.317	NPV @ 10%	(7.962)

IRR=L+((NPV_L/(NPV_L-NPV_H)*(H-L))

IRR=6+((21.317(21.317-(-7.962))*(10-6))

IRR=8.91%