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Chapter 3

Question 13

IRR of a perpetuity

A project will earn net cash flows of $4,000 for the foreseeable future. The
initial capital cost of the project is $17,000. Calculate the project’s IRR.

The give an NPV of zero, the PV of the cash inflows must be equal to the initial
capital outlay of $17,000.

PV of a perpetuity = cash flow × 1/r

$4,000 × 1/r = $17,000 at the IRR.

r = $4,000/$17,000 = 0.235 or 23.5%

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