Question

Filter Corp. has a project available with the following cash flows: Year Cash Flow 0 -13,500 1 6,400 2 7,700 3 4,500 4 4,100 What is the project's IRR? 27.40% 31.97% 29.68% 28.54% 30.45%

Answer 1

The project's Internal Rate of Return (IRR) is calculated to be 29.68%, indicating the rate at which the project's net present value equals zero, making it a feasible investment opportunity for Filter Corp..

Step-by-step explanation:

The Internal Rate of Return (IRR) of a project is the discount rate at which the net present value (NPV) of cash flows equals zero. To find the IRR, we calculate the NPV of the cash flows at different discount rates until the NPV equals zero. Using the given cash flows: (-13,500) at Year 0, 6,400 at Year 1, 7,700 at Year 2, 4,500 at Year 3, and 4,100 at Year 4, we apply the IRR formula.

By employing this formula, the IRR is calculated iteratively. After performing the calculations, the resulting IRR of the project is found to be 29.68%. This rate signifies that if the project's discount rate is approximately 29.68%, the project's NPV will be zero, indicating a break-even point. In other words, at this specific rate, the project's inflows equal the initial investment, making it a viable investment option.

The IRR is crucial in investment decision-making, as it allows comparison against a company's required rate of return or hurdle rate. If the IRR surpasses the company's required rate of return, the project is deemed acceptable. In this scenario, with an IRR of 29.68%, the project appears promising as it exceeds common hurdle rates, suggesting it would likely generate positive returns and could be considered for investment by Filter Corp.

Answer 2

The Internal Rate of Return (IRR) of a project, use trial and error or financial calculators/software. The IRR is the discount rate that makes the NPV of all cash flows equal to zero. In this case, the project's IRR is approximately 29.68%.

The Internal Rate of Return (IRR) of a project, you can use trial and error or use financial calculators/software. I'll provide you with an approximation using trial and error. The IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. In this case, the cash flows are as follows:

Year 0: -13,500

Year 1: 6,400

Year 2: 7,700

Year 3: 4,500

Year 4: 4,100

Using trial and error, you can try different discount rates until you find the rate that makes the NPV close to zero. One way to do this is to use the IRR formula:

NPV = CF0 / (1 + IRR)0 + CF1 / (1 + IRR)1 + CF2 / (1 + IRR)2 + CF3 / (1 + IRR)3 + CF4 / (1 + IRR)4

Where:

NPV is the Net Present Value (should be close to zero for the IRR).

CF0, CF1, CF2, CF3, CF4 are the cash flows in each year.

IRR is the Internal Rate of Return.

The IRR is the discount rate that makes the NPV of all cash flows equal to zero. In this case, the project's IRR is approximately 29.68%.