A firm with a 10.5 percent cost of capital is considering a project for this yea

Question

A firm with a 10.5 percent cost of capital is considering a project for this year’s capital budget. The project’s expected after-tax cash flows are as follows:

0

1

2

3

4

-$14,000

$5,000

$6,300

$4,300

$6,900

Calculate the project’s internal rate of return (IRR).

A firm with a 10.5 percent cost of capital is considering a project for this year’s capital budget. The project’s expected after-tax cash flows are as follows:

Year:

0

1

2

3

4

Cash flow:

-$14,000

$5,000

$6,300

$4,300

$6,900

Calculate the project’s internal rate of return (IRR).

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

14000=5000/1.0x+6300/1.0x^2+4300/1.0x^3+6900/1.0x^4

Hence x=IRR=21.30%(Approx).

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