Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $10
ID: 2775197 • Letter: C
Question
Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $10,400 and is received three years from today. Future cash flows in Stream A grow by 3 percent in perpetuity. Stream B ’s first cash flow is $9,300, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 11 percent.
Suppose that the two streams are combined into one project, called C. What is the IRR of Project C?
Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $10,400 and is received three years from today. Future cash flows in Stream A grow by 3 percent in perpetuity. Stream B ’s first cash flow is $9,300, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 11 percent.
Suppose that the two streams are combined into one project, called C. What is the IRR of Project C?
Explanation / Answer
Calculation of IRR of Project C:
Year 0
Year 1
Year 2
Year 3
Cash Flow from A
10400
Value of Cash Flows from A at the end of year 3
130000
Present value = Annual Cash inflows / (Discount rate - growth rate)
10400/ (11%-3%)
Cash Flow from B
-9300
Value of Cash Flows from B at the end of year 2
-84545.45455
Present value = Annual Cash inflows / (Discount rate - growth rate)
-9300/ (11%-0%)
Net Cash Flows (CF)
$ -
$ (84,545.45)
$ 130,000.00
IRR =
53.76%
Calculation of IRR of Project C:
Year 0
Year 1
Year 2
Year 3
Cash Flow from A
10400
Value of Cash Flows from A at the end of year 3
130000
Present value = Annual Cash inflows / (Discount rate - growth rate)
10400/ (11%-3%)
Cash Flow from B
-9300
Value of Cash Flows from B at the end of year 2
-84545.45455
Present value = Annual Cash inflows / (Discount rate - growth rate)
-9300/ (11%-0%)
Net Cash Flows (CF)
$ -
$ (84,545.45)
$ 130,000.00
IRR =
53.76%
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