Answer:
The IRR is 26.3
The project should be accepted
Explanation:
Period Cash Flow
0 -28643.0
1 21000.00
2 16000.00
3 4000.00
IRR 0.26299326 = 26.30
The IRR is the rate at which the net present value is zero
[tex]-28,643 + \frac{21,000}{1+IRR} + \frac{16,000}{(1+IRR)^{2}}+ \frac{4,000}{(1+IRR)^{3} } = 0[/tex]
It is calculate with trial an error.
using a financial calculator.
or excel.
for example we calculate with rate 0.26
[tex]-28,643 + \frac{21,000}{1+0.26} + \frac{16,000}{(1+0.26)^{2}}+ \frac{4,000}{(1+0.26)^{3} }[/tex]
NPV = 101.40
and rate 0.27
[tex]-28,643 + \frac{21,000}{1+0.27} + \frac{16,000}{(1+0.27)^{2}}+ \frac{4,000}{(1+0.27)^{3} }[/tex]
NPV = -234.79
at 26 the NPV is positive
at 27 negative, so the IRR is vbetween those two values.
once we have this, we start moving whit the decimals
26.1
26.2
26.3
until we are close enough
In this case at 26.3
[tex]-28,643 + \frac{21,000}{1+0.263} + \frac{16,000}{(1+0.263)^{2}}+ \frac{4,000}{(1+0.263)^{3} }[/tex]
NPV = -0.23
we are close enought on a project of thousands of dollars we are missing for cents.
