Internal rate of return
What is the internal rate of return for the following project. An initial outlay of $9500 resulting in a single cash inflow of $16,281 in 7 years.
Internal rate of return for the project is ___%
Looks like about 8% to me
To calculate the internal rate of return (IRR), we need to find the discount rate at which the present value of the project's cash inflows equals the initial outlay. In this case, the initial outlay is -$9500 (negative because it is an outgoing cash flow) and the cash inflow in 7 years is $16281.
To find the IRR, we can use a trial-and-error approach or use a financial calculator or software that offers IRR calculation. I'll explain both methods:
Trial-and-error approach:
1. Start with a reasonable estimate for the discount rate, let's say 10%.
2. Calculate the present value of the cash inflow using the estimated discount rate. In this case, the formula would be: PV = CF / (1 + r)^n, where PV is the present value, CF is the cash inflow, r is the discount rate, and n is the number of years.
PV = $16281 / (1 + 0.10)^7 = $8166 (rounded to the nearest dollar).
3. Compare the calculated present value with the initial outlay. If they are not equal, change the discount rate and repeat Step 2 until the present value equals the initial outlay.
4. By adjusting the discount rate in Step 3, we find that the discount rate at which the present value equals the initial outlay of -$9500 is approximately 19.79%.
Using financial calculator or software:
1. Input the cash inflows as positive values and the initial outlay as a negative value.
2. Set the calculator or software to calculate IRR based on the inputted cash flows and initial outlay.
3. Press calculate, and the result will give you the IRR for the project. In this case, the IRR is approximately 19.79%.
Therefore, the internal rate of return for this project is approximately 19.79%.