Q26RQ - Horngren'S Financial And Managerial Accounting

Question

How is IRR calculated with equal net cash inflows?

Step-by-Step Solution

Answer

By subtracting the anticipated future cash flows from the initial beginning value, dividing the result by the actual value, and multiplying the result by 100, one can determine the internal rate of return.

Step 1: example

Imagine that an investor requires $10,00,000 to fund a project that will provide $305,450 in cash flow annually for five years. The IRR is the rate at which those future cash flows can be valued at $10,00,000.

Step 2: calculation

Initial investment = PV of net cash inflows

 Initial investment = Amount of each cash inflow * Annuity PV factor (i = ?, n =5)

Annuity PV factor = Initial investment / Amount of each cash inflow

                              = 10,00,000 / 305450

                              = 3.27

Comparing present value chart here i = 16% that is IRR.