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Sample Test Problem 9.4 Management is considering developing new computer software. The cost of development will be $675,000, and management expects the net cash flow from sale of the software to be $195,000 for each of the next six years. If the discount rate is 14 percent, What is the IRR on this project? (Round answer to 3 decimal places,e.g. 15.221.) IRR %

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Answer:

Explanation:

Year  Cash flow   PV factor@15%  PV@15%   PV factor@20%  PV@20%

0   (675,000)       1.000         (675,000) 1.000       (675,000)

1    195,000   0.870          169,565         0.833        162,500

2    195,000   0.756          147,448          0.694         135,417

3    195,000   0.658          128,216          0.579         112,847

4    195,000   0.572           111,492           0.482         94,039

5    195,000   0.497           96,949           0.402         78,366

6    195,000   0.432           84,304           0.335         65,305

                                  NPV           62,974                        (26,526)

IRR = Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)

       = 15% + 5%*(62974/(62974 + 26526)  

       = 18.52%  

Therefore, The IRR on this project is 18.52%

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