Question

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $749,600. What is the internal rate of return of this project?

Answer 1

IRR is the rate at which NPV=0.

It can be calculated by trial and error method

let find NPV at 11%

Year	Cashflow	PVF@11%	Cashflow*PVF
0	(749,600)	1	(749,600.00)
1	237,600	0.9009	214054.05
2	237,600	0.8116	192841.49
3	237,600	0.7312	173731.07
4	274,800	0.6587	181019.27

NPV = PV of inflows-PV of outflows

= (214054.05+192841.49+173731.07+181019.27)-749600

= 761645.89-749600

= 12045.89

Since NPV is positive,, take a higher rate, say 12%

Year	Cashflow	PVF@11%	Cashflow*PVF
0	(749,600)	1	(749,600.00)
1	237,600	0.8929	212142.86
2	237,600	0.7972	189413.27
3	237,600	0.7118	169118.99
4	274,800	0.6355	174640.37

NPV = PV of inflows-PV of outflows

= (212142.86+189413.27+169118.99+174640.37)-749600

= 745315.49-749600

= -4284.51

IRR = R1+(NPV1(R2-R1))/(NPV1-NPV2)

= 11+((12045.89*(12-11))/(12045.89+4284.51)

= 11+(12045.89/16330.4)

= 11.7376359428

= 11.74%