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Chapter 3

Question 11

IRR

Calculate the internal rate of return (IRR) of the following cash flows. The NPV
at a discount rate of 8% is $2,000. Use 15% as the second discount rate.

Year $
0 (25,000)

1 10,000
2 9,000

3 8,000
4 5,000

Year $ Discount PV
factors 15%

0 (25,000) 1 (25,000)

1 10,000 0.870 8,700
2 9,000 0.756 6,804
3 8,000 0.658 5,264

4 5,000 0.572 2,860
NPV (1,372)

IRR = 8 + [$2,000/($2,000 + $1,372)] × (15 – 8)

IRR = 8 + 0.593 × 7 = 12.2%

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