Question

Park Co. is considering an investment that requires immediate payment of $27,000 and provides expected cash inflows of $9,000 annually for four years. If Park Co. requires a 10% return on its investments. What is the internal rate of return

Answer 1

Answer:

IRR =   12.92%

Explanation:

The IRR is the discount rate that equates the present value of cash inflows to that of cash outflows. At the IRR, the Net Present Value (NPV) of a project is equal to zero

If the IRR greater than the required rate of return , we accept the project for implementation  

If the IRR is less than that the required rate , we reject the project for implementation  

A project that provides annual cash flows of $24,000 for 9 years costs $110,000 today. Under the IRR decision rule, is this a good project if the required return is 8 percent?

Lets Calculate the IRR

Step 1: Use the given discount rate of 10% and work out the NPV

NPV = 9000× (1-1.10^(-4)/0.1) - 27,000 =1528.78

Step 2 : Use discount rate of 20% and work out the NPV (20% is a trial figure)

NPV = 9000× 1- 1.20^(-4)/0.2 - 27000 = -3701.38

Step 3: calculate IRR

IRR = a% + ( NPVa/(NPVa + NPVb)× (b-a)%

IRR = 10% +  1528.78/(1528.78+3701.38)× (20-10)%= 0.12923

     = 0.129230153  × 100

IRR =   12.92%