Question

A project has an initial cost of $55,000, expected net cash inflows of $10,000 per year for 11 years, and a cost of capital of 10%. What is the project's IRR? Round your answer to two decimal places.

Answer 1

The project's IRR can be found by calculating the discount rate that makes the net present value of the project's cash flows equal to zero. In this case, the IRR is approximately 15.49%.

Step-by-step explanation:

The IRR (Internal Rate of Return) can be calculated by finding the discount rate that makes the net present value of the project's cash flows equal to zero. In this case, the initial cost of the project is $55,000 and the expected net cash inflows are $10,000 per year for 11 years.

Using the formula for net present value (NPV), we can set up the equation:

NPV = -Initial Cost + (Cash inflow / (1 + r)^n)

Where r is the discount rate and n is the number of years.

Since the NPV is equal to zero at the IRR, we can solve for r:

0 = -55,000 + (10,000 / (1 + r)^1) + (10,000 / (1 + r)^2) + ... + (10,000 / (1 + r)^11)

To find the IRR, we can use a financial calculator or software to solve for r. The IRR for this project is approximately 15.49% when rounded to two decimal places.