6. Calculating IRR – compute the Internal Rate of Return (IRR) for the cash flows of the following two projects.
| year | project A | project B |
| 0 | -$3500 | -$2300 |
| 1 | 1800 | 900 |
| 2 | 2400 | 1600 |
| 3 | 1900 | 1400 |
Answer:
IRR for project A is:
0 = C0 + C1 /(1+IRR) + C2/(1+IRR)2 + C3/(1+IRR)3
0 = -$3500+ 1800/ (1+IRR) + 2400/(1+IRR)2 + 1900/(1+IRR)3
IRR =
And the IRR for project B is:
0 = C0 + C1 /(1+IRR) + C2/(1+IRR)2 + C3/(1+IRR)3
0 = -$2300+ 900/ (1+IRR) + 1600/(1+IRR)2 + 1400/(1+IRR)3
IRR =
Reference: Corporate Finance Book, Stephen A.Ross, Randolph W.Westerfield and Jeffrey Jaffe, Ninth Edition. Chapter 5, questions number 6, page 162.
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