Question

powerrus company is considering a project that calls for an initial cash outlay of $50,000. the expected net cash inflows from the project are $6,000 every two years in perpetuity. what is the irr of the project?

Answer 1

The IRR of the project with an initial cash outlay of $50,000 and $6,000 received every two years perpetually is 6%.

Step-by-step explanation:

The Internal Rate of Return (IRR) for a project is the discount rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project is zero. In this case, we are dealing with a perpetuity, which is a series of regular payments that continue indefinitely. The general formula for the present value of a perpetuity is PV = C / r, where C is the annual cash inflow and r is the discount rate (which represents the IRR in this context).

Here, the cash inflows are $6,000 every two years, so the comparable annual cash inflow is $3,000 (half the two-year inflow since it’s received every two years).

Using the perpetuity formula, the present value (PV) of these cash inflows calculated at the IRR would be equal to the initial cash outlay ($50,000).

So we have:

50000 = 3000 / r

Solving for r gives us:

r = 3000 / 50000 = 0.06 or 6%

Therefore, the IRR of the project is 6%.