Question

Sample Test Problem 9.4 Management is considering developing new computer software. The cost of development will be $675,000, and management expects the net cash flow from sale of the software to be $195,000 for each of the next six years. If the discount rate is 14 percent, What is the IRR on this project? (Round answer to 3 decimal places,e.g. 15.221.) IRR %

Answer 1

Step-by-step explanation:

Year Cash flow PV factor@15% PV@15% PV factor@20% PV@20%

0 (675,000) 1.000 (675,000) 1.000 (675,000)

1 195,000 0.870 169,565 0.833 162,500

2 195,000 0.756 147,448 0.694 135,417

3 195,000 0.658 128,216 0.579 112,847

4 195,000 0.572 111,492 0.482 94,039

5 195,000 0.497 96,949 0.402 78,366

6 195,000 0.432 84,304 0.335 65,305

NPV 62,974 (26,526)

IRR = Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)

= 15% + 5%*(62974/(62974 + 26526)

= 18.52%

Therefore, The IRR on this project is 18.52%