Question:
A company is considering an investment project that requires an
initial investment of $150,000. The project is expected to generate cash
flows over five years as follows:
Year 1: $40,000
Year 2: $35,000
Year 3: $30,000
Year 4: $25,000
Year 5: $20,000
Calculate the internal rate of return (IRR) for this project.
Answer:
To calculate the IRR for this project, we need to find the discount rate that
makes the net present value (NPV) of the project equal to zero. You can use a
financial calculator, spreadsheet software, or trial and error to find the IRR.
Using a financial calculator or spreadsheet software, you can find that the
IRR for this project is approximately 18.38%.
The IRR is the rate at which the project's cash flows result in a zero NPV. In
this case, it's approximately 18.38%, indicating the expected rate of return
for this investment project.