Practice Problem – IRR

Practice Question

Cases in Finance
Capital Budgeting
IRR
Short Answer

The Majestic Mulch and Compost Company is analyzing a proposed project with an initial cost of $50,000 and estimated cash flows of $15,000 per year for 5 years. What is the project’s IRR?

Answer +
C
Step-by-step solutions +

Step 1: Recognize this as an IRR problem where NPV = 0.

Step 2: Set the formula: 0 = -50,000 + (15,000 / (1 + r)^1) + (15,000 / (1 + r)^2) + ... + (15,000 / (1 + r)^5)

Step 3: Use a financial calculator or Excel’s =IRR() function with cash flows: =IRR([-50000,15000,15000,15000,15000,15000])

Step 4: IRR is approximately 15%.