Practice Question
A project requires an upfront investment of $100,000 and is expected to generate cash inflows of $40,000 for 4 years. What is its IRR?
Answer +
B
Step-by-step solutions +
Step 1: Set up the IRR equation:
$100,000 = $40,000 / (1 + r)^1 + $40,000 / (1 + r)^2 + $40,000 / (1 + r)^3 + $40,000 / (1 + r)^4
Step 2: Solve for the discount rate r that equates the present value of future cash inflows to the initial investment.
Step 3: Use a financial calculator or IRR function in Excel to compute IRR.
Result: IRR ≈ 15%
Since the IRR is positive and exceeds most standard required returns, the project is financially attractive.
$100,000 = $40,000 / (1 + r)^1 + $40,000 / (1 + r)^2 + $40,000 / (1 + r)^3 + $40,000 / (1 + r)^4
Step 2: Solve for the discount rate r that equates the present value of future cash inflows to the initial investment.
Step 3: Use a financial calculator or IRR function in Excel to compute IRR.
Result: IRR ≈ 15%
Since the IRR is positive and exceeds most standard required returns, the project is financially attractive.