Compute the IRR on the following cash flow streams: a. An initial investment of

Question

Compute the IRR on the following cash flow streams:

a. An initial investment of $22,986 followed by a single cash flow of $34,690 in year 6. (Round intermediate calculations to 0 decimal places, e.g. 1,251 and final answer to 2 decimal places, e.g. 15.25%.) IRR %

b. An initial investment of $1,074,075 followed by a single cash flow of $1,580,000 in year 4. (Round intermediate calculations to 0 decimal places, e.g. 1,251 and final answer to 2 decimal places, e.g. 15.25%.) IRR %

c. An initial investment of $2,175,412 followed by cash flows of $1,774,000 and $1,140,700 in years 2 and 4, respectively. (Round intermediate calculations to 0 decimal places, e.g. 1,251 and final answer to 2 decimal places, e.g. 15.25%.) IRR %

Explanation / Answer

IRR(R) is the rate of return for which the NPV of the project is zero.

NPV=0=Initial Investment + PV(Cash Flow in year 1) + ....... +PV(Cash Flow in year n).

a) In this case there is cashflow only in year six.

So 0= - 22,986 + 34,690/(1+R)6 .

So we get IRR, R= 0.07100 = 7.1%

b) In this case an initial investment of $1,074,075 followed by a single cash flow of $1,580,000 in year 4.

So 0= -1074075 + 1580000/(1+R)4

So IRR, R = 0.1013 = 10.13%

c) In this case an initial investment of $2,175,412 followed by cash flows of $1,774,000 and $1,140,700 in years 2 and 4, respectively.

So 0= -2175412 + 1774000/(1+R)2 + 1140700/(1+R)4

On solving this equation we get R = 0.0966 = 9.66%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.