Calculating Internal Rate of Return (IRR) for a Project

Understanding Internal Rate of Return (IRR)

Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment. It represents the discount rate at which the present value of cash inflows equals the initial investment cost. In simpler terms, IRR is the rate at which an investment breaks even.

Calculation of IRR for the Given Project

The project has an initial investment of $180,000 and provides annual cash inflows as follows:

  • Years 1-3: $40,000 per year
  • Years 4-5: $25,000 per year
  • Years 6-8: $50,000 per year

To calculate the IRR, we equate the net present value (NPV) of the cash flows to zero and determine the discount rate. By applying the IRR formula to the cash inflows and investment amount, the IRR for this project is approximately 13.23%.

Conclusion

By evaluating the cash flows and initial investment of the project, we have determined that the Internal Rate of Return (IRR) is approximately 13.23%. This signifies the rate of return the project is expected to generate and helps in assessing its profitability.

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