Practice Question
The Majestic Mulch and Compost Company has a project with cash flows of $50,000 for 5 years and an initial investment of $150,000. What is the IRR?
Answer +
B
Step-by-step solutions +
Step 1: Understand the IRR formula.
IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero.
Step 2: Set up the IRR equation:
0 = -$150,000 + ($50,000 / (1 + IRR)^1) + ($50,000 / (1 + IRR)^2) + ... + ($50,000 / (1 + IRR)^5)
Step 3: Use a financial calculator or Excel function =IRR() to compute IRR.
The IRR is approximately 20%.