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Driscoll Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the IRR for the project. [HINT: You may want to use a financial calculator. If so, list the equation, draw a time line, display the processes (how you click the calculator), and give the final IRR answer.]

Respuesta :

Answer:

IRR= 23.375%

Explanation:

Given: Cash flow= $1,200,000

           Initial investment= $2400000

Lets first compute IRR for Project, assuming rate of return at 23.375% or 0.233.

Formula: [tex]NPV= \frac{cash\ flow}{(1+r)^{n} } -initital\ investment[/tex]

[tex]NPV= \frac{\$ 1,200,000}{(1+0.23375)^{1} }+\frac{\$ 1,200,000}{(1+0.23375)^{2}}+\frac{\$ 1,200,000}{(1+0.23375)^{3}} -\$ 2400000 [/tex]

NPV has to be equal to zero to know if IRR is correct to find if project worth enough to invest.

⇒[tex]NPV= \frac{\$ 1,200,000}{1.23375 }+\frac{\$ 1,200,000}{1.5221}+\frac{\$ 1,200,000}{1.8779390} -\$ 2400000 [/tex]

⇒[tex]NPV= 972644.37+788364.23+638998.36 -\$ 2400000 [/tex]

⇒ [tex]NPV= \$ 2400000  -\$ 2400000 [/tex]

∴ NPV= 0

Hence, 23.375% is the IRR for the project.