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Discounting and investment appraisal

Question 13

IRR

Calculate the internal rate of return (IRR) of the following cash flows. The NPV
at 5% is 2,005

Timing Cash flow

0 (70,000)
1 30,000
2 20,000
3 15,000
4 15,000

Timing Cash flow Discount factor 10% Present value

0 (70,000) 1 (70,000)
1 30,000 0.909 27,270
2 20,000 0.826 16,520
3 15,000 0.751 11,265
4 15,000 0.683 10,245

NPV = (4,700)

IRR = 5 + (2,005/(2,005 + 4,700)) × (10 – 5)

IRR = 5 + 0.299 × 5

IRR = 6.5%

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