Answer:
IRR = 12.92%
Explanation:
The IRR is the discount rate that equates the present value of cash inflows to that of cash outflows. At the IRR, the Net Present Value (NPV) of a project is equal to zero
If the IRR greater than the required rate of return , we accept the project for implementation
If the IRR is less than that the required rate , we reject the project for implementation
A project that provides annual cash flows of $24,000 for 9 years costs $110,000 today. Under the IRR decision rule, is this a good project if the required return is 8 percent?
Lets Calculate the IRR
Step 1: Use the given discount rate of 10% and work out the NPV
NPV = 9000× (1-1.10^(-4)/0.1) - 27,000 =1528.78
Step 2 : Use discount rate of 20% and work out the NPV (20% is a trial figure)
NPV = 9000× 1- 1.20^(-4)/0.2 - 27000 = -3701.38
Step 3: calculate IRR
IRR = a% + ( NPVa/(NPVa + NPVb)× (b-a)%
IRR = 10% + 1528.78/(1528.78+3701.38)× (20-10)%= 0.12923
= 0.129230153 × 100
IRR = 12.92%
