A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

Problem 9-7 Calculating IRR [LO5]

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

   

Year	Cash Flow
0	–$	28,600
1		12,600
2		15,600
3		11,600

  

If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = –$28,600 + $12,600/(1 + IRR) + $15,600/(1 + IRR)2 + $11,600/(1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 18.75%

Since the IRR is greater than the required return, we would accept the project.

  

Calculator Solution:

  

CFo	–$28,600
C01	$12,600
F01	1
C02	$15,600
F02	1
C03	$11,600
F03	1
IRR CPT
18.75%