Question

Use a financial calculator or an Excel spreadsheet to estimate the IRR for each of the following investments.

	Investment
	A	B
Initial Investment	$                8,500.00	$      9,500.00
End of Year	Income
1	$                2,500.00	$      2,000.00
2	$                2,500.00	$      2,500.00
3	$                2,500.00	$      3,000.00
4	$                2,500.00	$      3,500.00
5	$                2,500.00	$      4,000.00

Answer 1

IRR (internal rate of return) is the rate that equates the investment outlay with the present value of cash flow received after one period

At IRR, NPV = 0; or

PV of future cash flows − Initial Investment = 0; or

The IRR can be find by using financial calculater, excel application or by using trial and error method

Following are the steps for IRR calculation in EXCEL application

The spread sheet below given the cash flow of the project, we write the IRR formula in column C9:=IRR (C3:C8).The project flow including the cash outlay in the beginning (C0 in the year) are contained in column C3 through column C8

	A	B	C	D
1
2	YEAR
3	0	C0	8500
4	1	C1	2500
5	2	C2	2500
6	3	C3	2500
7	4	C4	2500
8	5	C5	2500
9		IRR	14.404%	IRR(C3:C8)

	A	B	C	D
1
2	YEAR
3	0	C0	9500
4	1	C1	2000
5	2	C2	2500
6	3	C3	3000
7	4	C4	3500
8	5	C5	4000
9		IRR	15.362%	IRR(C3:C8)