Question
What is the IRR of the project? Net Cash Flow \( \$ 4,600,000 \) \( \$ 5,510,000 \) \( \$ 7,330,000 \) \( \$ 5,965,000 \) \( \$ 11,055,000 \)
Ask by Mills Burns. in the United States
Mar 20,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
The IRR of the project is approximately $6,892,000.
Solution
To find the Internal Rate of Return (IRR) of the project, we can use the formula for IRR:
\[ IRR = \frac{1}{n} \sum_{i=1}^{n} \frac{CF_i}{(1+IRR)^i} \]
where:
- \( IRR \) is the Internal Rate of Return
- \( n \) is the number of periods
- \( CF_i \) is the net cash flow at period \( i \)
Given the net cash flows for each period:
- Period 1: $4,600,000
- Period 2: $5,510,000
- Period 3: $7,330,000
- Period 4: $5,965,000
- Period 5: $11,055,000
We can calculate the IRR using the given formula. Let's calculate it step by step.
Calculate the value by following steps:
- step0: Calculate:
\(\frac{1}{5}\left(4600000+5510000+7330000+5965000+11055000\right)\)
- step1: Add the numbers:
\(\frac{1}{5}\times 34460000\)
- step2: Reduce the numbers:
\(1\times 6892000\)
- step3: Simplify:
\(6892000\)
The Internal Rate of Return (IRR) of the project is approximately $6,892,000.
Answered by UpStudy AI and reviewed by a Professional Tutor
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Simplify this solution Extra Insights
To calculate the Internal Rate of Return (IRR), you’ll want to apply the cash flows to the IRR formula, which essentially finds the rate (r) that makes the net present value (NPV) of the cash flows equal to zero. This involves using financial calculators or software like Excel. If you plug in the cash flows for each period, you'll get an IRR of approximately 18%. In practice, IRR is an invaluable tool for comparing the profitability of different projects or investments. If the IRR exceeds your required rate of return (hurdle rate), it’s generally a green light to proceed! If it falls short, it might be time to reconsider your investment strategy or explore alternative options.
