Question

Using the IRR Function
Years	Cash Flows
0	($100,000)
1	$6,000
2	$7,000
3	$8,000
4	$9,000
5	$10,500
6	$11,500
7	$12,600
8	$15,000
9	$17,000
10	$70,000
Total	$66,600
IRR		<=== Use IRR funtion to calculate the Internal Rate of Return of this Investment
		Please format with two decimal places.

Answer 1

Solution:

At IRR, Present value of cash flows will be equal to present value of cash outflows.

Lets calculate PV of Cash Inflows at 7% and 8%.

Computation of Present Value of Cash Inflows at 7%
Period	Cash Inflows	PV Factor at 7%	Present Value
1	$6,000.00	0.934579	$5,607.48
2	$7,000.00	0.873439	$6,114.07
3	$8,000.00	0.816298	$6,530.38
4	$9,000.00	0.762895	$6,866.06
5	$10,500.00	0.712986	$7,486.35
6	$11,500.00	0.666342	$7,662.94
7	$12,600.00	0.62275	$7,846.65
8	$15,000.00	0.582009	$8,730.14
9	$17,000.00	0.543934	$9,246.87
10	$70,000.00	0.508349	$35,584.45
Total			$101,675.39

Computation of Present Value of Cash Inflows at 8%
Period	Cash Inflows	PV Factor at 8%	Present Value
1	$6,000.00	0.925926	$5,555.56
2	$7,000.00	0.857339	$6,001.37
3	$8,000.00	0.793832	$6,350.66
4	$9,000.00	0.73503	$6,615.27
5	$10,500.00	0.680583	$7,146.12
6	$11,500.00	0.63017	$7,246.95
7	$12,600.00	0.58349	$7,351.98
8	$15,000.00	0.540269	$8,104.03
9	$17,000.00	0.500249	$8,504.23
10	$70,000.00	0.463193	$32,423.54
Total			$95,299.72

IRR = 7% + (PV of cash flows at 7% - $100,000) / (PV of cash inflows at 7% - PV of cash inflows at 8%)

= 7% + ($101,675.39 - $100,000) / ($101,675.39 - $95299.72) = 7.26%

Hence IRR is 7.26%

Computation of IRR using IRR Function: