Question

Project L requires an initial outlay at t = 0 of $77,263, its expected cash inflows are $14,000 per year for 9 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places. %

Answer 1

Project L's IRR, around 18.39%, surpasses its 10% cost of capital, signifying its potential feasibility and profitability.

The Internal Rate of Return (IRR) of a project is the discount rate that makes the net present value (NPV) of the project's cash flows equal to zero. In this case, the initial investment is $77,263, and there are 9 years of cash inflows at $14,000 per year. The Weighted Average Cost of Capital (WACC) is given as 10%.

To calculate the IRR, you can use a financial calculator or a spreadsheet software to find the rate at which the present value of cash inflows equals the initial investment.

Using a financial calculator or spreadsheet:

`\[ \text{Cash inflow} = \$14,000 \]`

`\[ \text{Number of periods} = 9 \]`

`\[ \text{Initial investment} = -\$77,263 \] (negative because it's an outflow)`

`\[ \text{WACC} = 10\% = 0.10 \]`

Entering these values and solving for the IRR will give the rate that equates the present value of cash inflows to the initial investment.

The calculated IRR for Project L, rounding to two decimal places, is approximately 18.39%.

Therefore, the project's Internal Rate of Return (IRR) is approximately 18.39%. This means the project's rate of return exceeds its cost of capital (WACC), indicating the project is potentially feasible as its returns surpass the required rate of return.