Question

Mass company is investing in a giant crane. it is expected to cost $6.0 million in initial investment, and it is expected to generate an end-of-year cash flow of $3.0 million each year for three years. at the end of the fourth year, there will be a $1.0 million disposal cost. calculate the irr for the project if the cost of capital is 12%.

Answer 1

17.8% is the irr for the project if the cost of capital is 12%. IRR is the interest rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equal tgo zero. IRR calculations rely on the same formula as NPV does. To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate (r), which is the IRR.  Multiply the net cash flow for each period by its discount factor to obtain its present value. Sum the present values of each cash flow to calculate the NPV. Find the IRR, the discount rate, that makes the NPV zero.