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Q: Consider a project with the expected cash flows: ( Answered,   0 Comments )
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?
Subject: Re: Consider a project with the expected cash flows:
Answered By: elmarto-ga on 09 Jun 2005 05:33 PDT
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

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"

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!
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