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Financial Management: The Internal Rate of Return

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Year........ Undiscounted free cash flows
0..............(380,000)
1...............20,000
2...............30,000
3...............200,000
4...............175,000
5...............130,000
6................145,000

Required rate of return = 15%

Question: The internal rate of return is closest to which of the following answers?
a. 20.50%
b. 18.20%
c. 16.45%
d. 14.25%
e. none of the above are within 1% of the correct answer. (Please provide the correct answer.)

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Solution Summary

This solution provides a brief discussion of the IRR concept and then goes into the specific calculation itself, indicating that it can be done both by hand and from using Excel. A Word document is attached which contains the IRR calculation portion of the response.

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The internal rate of return is used in capital budgeting, it's the interest rate that makes net present value of all cash flow ...

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