Question

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project. [HINT: You may want to use a financial calculator. If so, list the equation, draw a time line, display the processes (how you click the calculator), and give the final IRR answer.]

Answer 1

Answer:

IRR= 23.375%

Explanation:

Given: Cash flow= $1,200,000

           Initial investment= $2400000

Lets first compute IRR for Project, assuming rate of return at 23.375% or 0.233.

Formula: $NPV= \frac{cash\ flow}{(1+r)^{n} } -initital\ investment$

$NPV= \frac{\ 1,200,000}{(1+0.23375)^{1} }+\frac{\ 1,200,000}{(1+0.23375)^{2}}+\frac{\ 1,200,000}{(1+0.23375)^{3}} -\ 2400000$

NPV has to be equal to zero to know if IRR is correct to find if project worth enough to invest.

⇒$NPV= \frac{\ 1,200,000}{1.23375 }+\frac{\ 1,200,000}{1.5221}+\frac{\ 1,200,000}{1.8779390} -\ 2400000$

⇒$NPV= 972644.37+788364.23+638998.36 -\ 2400000$

⇒ $NPV= \ 2400000 -\ 2400000$

∴ NPV= 0

Hence, 23.375% is the IRR for the project.