Question

Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows -$3,000 $1,200 $1,300 $1,400 13.96% 14.16% 14.78% 15.22% 15.75%

Answer 1

Answer:

13.96%

Explanation:

Internal rate of return (IRR) is the interest rate at which net present value of all cash flows becomes zero. It measure the profitability of the investment.

IRR of Current Project

Year                  0              1              2              3

Cash flows -$3,000    $1,200    $1,300     $1,400

Net Present Value at 10% = [ ( -30,000 x (1 + 10%)^-0 ) + ( 1,200 x (1 + 10%)^-1 ) + ( 1,200 x (1 + 10%)^-2 ) + ( 1,400 x (1 + 10%)^-3 ) ] = $197.39

Net Present Value at 12% = [ ( -30,000 x (1 + 12%)^-0 ) + ( 1,200 x (1 + 12%)^-1 ) + ( 1,200 x (1 + 12%)^-2 ) + ( 1,400 x (1 + 12%)^-3 ) ] = $93.1

IRR = Lower rate + [ Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] (higher rate - lower rate)

IRR = 10% + [ 197.39 / ($197.39 - $93.1) ] (12% - 10%)

IRR = 13.8%

Due to rounding factor the nearest option and the correct option is 13.96%