Question
Determine the Rate of Return (196) for the cash flow shown below, if the MARR is...
Determine the Rate of Return (196) for the cash flow shown below, if the MARR is 7%: Year 0 1-5 6-8 Cash Flow - 200,000 +50,000 +30,000 over 15% less than 10% 13% 11%
Answers
Let IRR is I%, then
-200000 + 50000 * (P/A, I%,5) + 30000 * (P/A, I%,3) * (P/F, i%,5) = 0
50000 * (P/A, I%,5) + 30000 * (P/A, I%,3) * (P/F, i%,5) = 200000
Dividing by 10000
5 * (P/A, I%,5) + 3 * (P/A, I%,3) * (P/F, i%,5) = 20
using trail and error method
When I = 15%, value of 5 * (P/A, I%,5) + 3 * (P/A, I%,3) * (P/F, i%,5) = 5 * 3.352155 + 3*2.283225 * 0.497177 = 20.166274
When I = 16%, value of 5 * (P/A, I%,5) + 3 * (P/A, I%,3) * (P/F, i%,5) = 5 * 3.274294 + 3*2.245890 * 0.476113 = 19.579362
using interpolation
i = 15% + (20.166274 - 20) / (20.166274 - 19.579362)*(16%-15%)
I = 15% + 0.28%
I = 15.28%
First option is correct ie. IRR is over 15%
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