Problem 12-2 IRR A project has an initial cost of $50,000, expected net cash inf
ID: 2784675 • Letter: P
Question
Problem 12-2 IRR A project has an initial cost of $50,000, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 10%. What is the project's IRR? Round your answer to two decimal places. Problem 12-2 IRR A project has an initial cost of $50,000, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 10%. What is the project's IRR? Round your answer to two decimal places. Problem 12-2 IRR A project has an initial cost of $50,000, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 10%. What is the project's IRR? Round your answer to two decimal places.Explanation / Answer
CALCULATION OF PRESNT VALUE OF THE PROJECT Years Cash Flows PVF @ 10% Present Value 0 -$50,000 1 -$50,000.00 1 $12,000 0.9091 $10,909.09 2 $12,000 0.8264 $9,917.36 3 $12,000 0.7513 $9,015.78 4 $12,000 0.6830 $8,196.16 5 $12,000 0.6209 $7,451.06 6 $12,000 0.5645 $6,773.69 7 $12,000 0.5132 $6,157.90 8 $12,000 0.4665 $5,598.09 Net Present Value = $14,019.11 Answer = NPV of the project = 14,019.11 IRR : IRR Means with a particular Percentage rate , At that point the present value become the zero CALCULATION OF THE IRR OF THE PROJECT First we calculate randomly present value @ 17% discounting rate 17% Years Cash Flows PVF @ 17% Present Value 0 -$50,000 1 -$50,000.00 1 $12,000 0.8547 $10,256.41 2 $12,000 0.7305 $8,766.16 3 $12,000 0.6244 $7,492.45 4 $12,000 0.5337 $6,403.80 5 $12,000 0.4561 $5,473.33 6 $12,000 0.3898 $4,678.06 7 $12,000 0.3332 $3,998.34 8 $12,000 0.2848 $3,417.39 Net Present Value = $485.95 With PVF of 17% we are getting positive = 485.95 Secondly we calculate randomly present value @ 18% discounting rate 18% Years Cash Flows PVF @ 18% Present Value 0 -$50,000 1 -$50,000.00 1 $12,000 0.8475 $10,169.49 2 $12,000 0.7182 $8,618.21 3 $12,000 0.6086 $7,303.57 4 $12,000 0.5158 $6,189.47 5 $12,000 0.4371 $5,245.31 6 $12,000 0.3704 $4,445.18 7 $12,000 0.3139 $3,767.10 8 $12,000 0.2660 $3,192.46 Net Present Value = -$1,069.21 With PVF of 18% we are getting negative = -1,069.21 In the given case the pv with 17% is coming to postive means the present value is more then 17% but with 18 % Present value cash flow become negative so the present value is between 17% and 18% So the differecne in both % net present value is = $485.95 - -$1,069.21 Total is become = $1,555.16 So , the difference % = $485.95 "/"By $1,555.16 So , the difference % = 0.31 So, the IRR = 17.31% Answer = IRR = 17.31%