Practice Question
A project has an initial investment of $100,000 and cash inflows of $30,000 for 5 years. What is its IRR?
Answer +
B
Step-by-step solutions +
To calculate IRR (Internal Rate of Return), we use the formula:
0 = -Initial Investment + Σ [Cash Flow / (1 + IRR)^t]
For this project:
0 = -100,000 + 30,000 / (1 + IRR) + 30,000 / (1 + IRR)^2 + ... + 30,000 / (1 + IRR)^5
Solving this equation using a financial calculator or Excel function =IRR(...) gives an IRR of approximately 20%.
Final Answer: IRR ≈ 20%
0 = -Initial Investment + Σ [Cash Flow / (1 + IRR)^t]
For this project:
0 = -100,000 + 30,000 / (1 + IRR) + 30,000 / (1 + IRR)^2 + ... + 30,000 / (1 + IRR)^5
Solving this equation using a financial calculator or Excel function =IRR(...) gives an IRR of approximately 20%.
Final Answer: IRR ≈ 20%