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Cash Flows: Calculating the IRR

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You are considering an investment in a project with a life of eight years, an initial outlay of $120,000, and annual after-tax cash flows of $52,000. The project also requires an increase in inventories of $22,000. This $22,000 investment in inventory is required at the outset of the project and will be released when the project is completed. The appropriate discount rate for this project is 10%.

a. Calculate the payback period for this project.
b. Calculate the NPV for this project.
c. Should this project be accepted? Explain.

Calculate the IRR for the following cash flows. Is the project acceptable if the firm's cost of capital is 12%?
End of Year Cash Flow ($)
0.........................$400,000
1.........................100,000
2..........................200,000
3..........................300,000

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Solution Summary

This solution is comprised of a response regarding how to calculate the IRR for a given cash flow report, in order to comment on the firm's cost of capital. An Excel document is attached to this response which shows how the IRR values have been computed and a Word document contains the full solution.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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