Question

Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project. [HINT: You may want to use a financial calculator. If so, list the equation, draw a time line, display the processes (how you click the calculator), and give the final IRR answer.]

Answer 1

IRR= 23.375%

Step-by-step explanation:

Given: Cash flow= $1,200,000

Initial investment= $2400000

Lets first compute IRR for Project, assuming rate of return at 23.375% or 0.233.

Formula:
`NPV= (cash\ flow)/((1+r)^(n) ) -initital\ investment`

`NPV= (\$ 1,200,000)/((1+0.23375)^(1) )+(\$ 1,200,000)/((1+0.23375)^(2))+(\$ 1,200,000)/((1+0.23375)^(3)) -\$ 2400000`

NPV has to be equal to zero to know if IRR is correct to find if project worth enough to invest.

⇒
`NPV= (\$ 1,200,000)/(1.23375 )+(\$ 1,200,000)/(1.5221)+(\$ 1,200,000)/(1.8779390) -\$ 2400000`

⇒
`NPV= 972644.37+788364.23+638998.36 -\$ 2400000`

⇒
`NPV= \$ 2400000  -\$ 2400000`

∴ NPV= 0

Hence, 23.375% is the IRR for the project.