A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

Problem 9-7 Calculating IRR [LO5]

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

   

Year	Cash Flow
0	–$	27,200
1		11,200
2		14,200
3		10,200

  

If the required return is 16 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR

%

  

Should the firm accept the project?

No

 

Explanation:

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = –$27,200 + $11,200 / (1 + IRR) + $14,200 / (1 + IRR)2 + $10,200 / (1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 14.96%

Since the IRR is less than the required return, we would reject the project.

  

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

	CFo	–$27,200
	C01	$11,200
	F01	1
	C02	$14,200
	F02	1
	C03	$10,200
	F03	1
	IRR CPT
	14.96%