Question

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A B C 0 $ (1,000) $(5,000) $(50,000) 1 $ 300 $ 1,700 $ 0 2 $300 $ 1,700 $15,000 3 $ 600 $1,700 $ 28,500 4 $300 $1,700 $ 33,000 What is the IRR of the best project

Answer 1

Project A has the highest IRR. the IRR is 17.49%

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator

For project A

Cash flow in year 0 = -1000

Cash flow in year 1 = 300

Cash flow in year 2 = 300

Cash flow in year 3 = 600

Cash flow in year 4 = 300

IRR = 17.49%

For project B

Cash flow in year 0 = -5000

Cash flow each year from year 1 to 4 = 1700

IRR = 13.54%

For project C

Cash flow in year 0 = -50,000

Cash flow in year 1 = 0

Cash flow in year 2 = 15,000

Cash flow in year 3 = 28,500

Cash flow in year 4 = 33,000

IRR = 14.23%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.