Internal Rate of Return A project is estimated to cost $463,565 and provide annu

Question

Internal Rate of Return

A project is estimated to cost $463,565 and provide annual net cash flows of $115,000 for nine years.

Determine the internal rate of return for this project, using the Present Value of an Annuity of $1 at Compound Interest table shown above.
%

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

IRR : IRR Means with a particular Percentage rate , At that point the present value become the zero CALCULATION OF THE IRR OF THE PROJECT First we calculate randomly present value @ 6% discounting rate Years Cash Flows 6% Present Value 0 -$4,63,565 1 -$4,63,565.00 1 to 9 Years $1,15,000 6.8020 $7,82,230.00 Net Present Value = $3,18,665.00 With PVF of 6% we are getting positive =           3,18,665.00 First we calculate randomly present value @ 10% discounting rate Years Cash Flows 10% Present Value 0 -$4,63,565 1 -$4,63,565.00 1 to 9 Years $1,15,000 5.7590 $6,62,285.00 Net Present Value = $1,98,720.00 With PVF of 10% we are getting positive =           1,98,720.00 First we calculate randomly present value @ 12% discounting rate Years Cash Flows 12% Present Value 0 -$4,63,565 1 -$4,63,565.00 1 to 9 Years $1,15,000 5.3280 $6,12,720.00 Net Present Value = $1,49,155.00 With PVF of 12% we are getting positive =           1,49,155.00 First we calculate randomly present value @ 15% discounting rate Years Cash Flows 12% Present Value 0 -$4,63,565 1 -$4,63,565.00 1 to 9 Years $1,15,000 4.7720 $5,48,780.00 Net Present Value = $85,215.00 With PVF of 15% we are getting positive =               85,215.00 Secondly we calculate randomly present value @ 20% discounting rate Years Cash Flows PVF @ 20% Present Value 0 -$4,63,565 1 -$4,63,565.00 1 to 9 Years $1,15,000 4.0310 $4,63,565.00 Net Present Value = $0.00 So the Present Vallue with 20% is zero, So the IRR is 20% Answer = IRR = 20%

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