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Q: Consider a project with the expected cash flows: ( Answered,   0 Comments )
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 Subject: Consider a project with the expected cash flows: Category: Business and Money > Accounting Asked by: skiphodge-ga List Price: \$15.00 Posted: 09 Jun 2005 03:20 PDT Expires: 09 Jul 2005 03:20 PDT Question ID: 531262
 ```Year Cash flow 0 - \$61,000 1 + 61,000 2 + 97,000 3 - \$97,000 What is this project's internal rate of return? If the discount rate is 5%, what is this project's net present value?```
 ```Hi skiphodge! First of all, let's see a definition of "internal rate of return" (IRR): "The Internal Rate of Return (IRR) is defined as the discount rate that makes the project have a zero Net Present Value (NPV)...." IRR definition http://www.odellion.com/pages/financial%20models/IRR/financialmodels_irr_definition.htm For a complete definition, please check the website. There is no analytical formula to find the IRR of a project, so it usually must be done either by trial and error or with appropiate software, such as Microsoft Excel. In your case, however, the IRR is easy to find, because the sum of the cash flows is zero. Therefore, with a discount rate equal to 0%, the NPV of the project is zero: NPV = -61000 + 61000/(1+0)^1 + 97000/(1+0)^2 - 97000/(1+0)^3 = -61000 + 61000 + 97000 - 97000 = 0 So a discount rate of 0% is what makes the NPV of this project to be zero. Therefore, the Internal Rate of Return of this project is 0%. In order to answer the second question, we simply use the NPV formula: NPV = -61000 + 61000/(1+0.05) + 97000/(1+0.05)^2 - 97000/(1+0.05)^3 = 1284.85 Therefore, the net present value of this project when the discount rate is 5%, is \$1,284.85 Google search terms definition "internal rate of return" ://www.google.com.ar/search?hl=es&q=definition+%22internal+rate+of+return%22&meta= I hope this helps! If you have any questions regarding my answer, please don't hesitate to request a clarification. Otherwise I await your rating and final comments. Best wishes! elmarto```