Need help on this question on IRR

Business & Finance
Tutor: None Selected Time limit: 1 Day

A project has an initial outlay of $1,939. It has a single cash flow at the end of year 5 of $4,276. What is the internal rate of return (IRR) for the project?

Round the answer to two decimal places in percentage form.

Oct 2nd, 2015

Thank you for the opportunity to help you with your question!

From the NPV formula (see wikipedia) IRR  is obtained by solving the equation

1939/(1+r)^0-4276/(1+r)^6=0 (calculation to end of 5th year or beginning of 6th year)

where r= IRR

This is most easily solved in Excel by applying the function = IRR ( array, guess)

I used array values (range of cells in excel) = 1939, 0, 0, 0,0,  -4276 (is the cash flow at the begining of each year)

guess = 1

We get r=17%

Check:

1939(1+22%)^5=4276



Please let me know if you need any clarification. I'm always happy to answer your questions.
Oct 2nd, 2015

Correction, the formula above should be

1939/(1+r)^0-4276/(1+r)^5=0 (with a power of 5 instead of 6 ). Result is OK.

Oct 2nd, 2015

How would I compute it using the IRR on excel?

Oct 2nd, 2015

(1) Enter the 6 numbers 1939, 0, 0, 0,0,  -4276 into 6 consecutive cells in the worksheet, say C1:C6

(2) Enter the following formula in another cell: =IRR(C1:C6, 10%) The result will be the answer (17%). The 10% is just an initial guess - it could be anything like 80% or 50% and it'll work.

Oct 3rd, 2015

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