Calculating the internal rate of return (IRR)
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The cost of investment $30,000
The estimated annual profit $6,000 for the first year
The annual profit increases by 20% annually
The useful life of the investment is 5 years
Find the internal rate of return of the investment. Show calculation.
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Solution Summary
The solution provides a detailed description of how to determine IRR. The internal rate of return is the rate, of discounting, that will make the initial cashflow equal to all expected cash inflows. The solution provides a technique, for estimating IRR, that will be useful to anyone interested in Capital Budgeting or project evaluation.
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The IRR is the rate, of discounting, that will equalize the capital outlay with the total cashflows expected throughout the lifetime of a project.
In doing an IRR analysis, you must choose two random discount rates. One rate will give you a positive NPV while the other rate will give a Negative NPV
The IRR formula is
IRR = Lower ...
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