Question

could you please show me how to compute IRR (internal Rate of Return) using Time Value of money table. not math fomula. Assume initial investement is $75,000, and 1st yer $25,000, 2nd year $25,000, 3rd year $20,000, 4th year $15,000 and 5th year $15,000. using 2 step process->Present value factor=amount invested/annual net cash flows. (I dont know how to get annual cash flows, and how I can identify the discount rate by searching the Table.

Thank you!

Answer 1

Solution:

Initial investment = $75,000

IRR using 2 steps process where PV factor = Amount invested / Annual net cash flows can be calculated if there are even cash flows in each year.

However in this case cash flows are not even. Therefore IRR will be calculated using trial and error method. At IRR Present value of cash inflows will be equal to investment amount.

Let calculate Present value of cash flows at 11% and 12%

Computation of Present Value of Cash Inflows
Cash Flows	PV Factor - 11%	Present Value at 11%	PV Factor - 12%	Present Value at 12%
25000	0.900901	$22,522.52	0.892857	$22,321.43
25000	0.811622	$20,290.56	0.797194	$19,929.85
20000	0.731191	$14,623.83	0.711780	$14,235.60
15000	0.658731	$9,880.96	0.635518	$9,532.77
15000	0.593451	$8,901.77	0.567427	$8,511.40
Total		$76,219.65		$74,531.05

IRR = 11% + ($76,219.65 - $75,000) / ($76219.65 - $74531.05) = 11.72%