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# Calculating IRR by interpolation

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Hoboken Ferry is elevating two different ferries. The Weehawken and the Hoboken. The economic data is as follows.

Weehawken Hoboken
Initial Investment \$6 million \$8 million
Yearly Revenue \$4 million \$6 million
Annual Maintenance Cost \$2 million \$3 million
Service Life 10 10

a) Calculate the IRR for Weehawken.
Please use interpolation. (Hint: Use i = 30% to 40% for interpolation)

b) Calculate the IRR for Hoboken.

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https://brainmass.com/economics/personal-finance-savings/calculating-irr-interpolation-385861

#### Solution Preview

Please refer attached file for better clarity of formulas and table.

Solution:

Net Cash flow in Year 0=initial investment=(\$6,000,000)
Net cash flow in year 1-10=Revenue-Maintenance=2000000
Let us calculate PV of cash flows at various rates (30%, 31%, 32%, ....40%)

Year End Net Cash flow PV @ 30% PV @ 31% PV @ 32% PV @ 40%
n Cn Cn/(1+30%)^n Cn/(1+31%)^n Cn/(1+32%)^n Cn/(1+40%)^n
0 -6,000,000 -6,000,000 -6,000,000 -6,000,000 -6,000,000
1 2,000,000 1,538,462 1,526,718 1,515,152 1,428,571
2 2,000,000 1,183,432 1,165,433 1,147,842 1,020,408
3 2,000,000 910,332 889,644 869,577 728,863
4 2,000,000 700,256 679,117 658,771 520,616
5 2,000,000 538,658 518,410 499,069 371,869
6 2,000,000 414,352 395,733 378,082 265,621
7 2,000,000 318,733 302,086 286,426 189,729
8 2,000,000 245,179 230,600 216,989 135,521
9 2,000,000 ...

#### Solution Summary

The solution describes the steps to calculate IRR by interpolation.

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Similar Posting

## Calculating NPW and IRR

The Stefinho De Rio company is evaluating two alternatives X and Y to invest for their travel business.

Alternative X Alternative Y
Initial investment \$ 1.2 million \$1 million
Net annual savings \$ 300,000 \$250,000
Salvage value \$200,000 \$200,000
Project life 6 6
The MARR is 12%.

a) Calculate the PW for each alternative.
b) Calculate the IRR for each alternative.
Use interpolation (Hint: Use i = 12% to 18% for interpolation)
c) Which investment is better and why?

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