Question

Question 10
Fragile Express Delivery is evaluating a project that has the following annual free cash flows:

Period

0
0

1
1

Free Cash Flow

−
500
−500

200
200

What is the project's IRR?


1.4
1.4



0.4
0.4



−
0.6
−0.6



1.5
1.5


1 point
Coursera Honor C

Answer 1

To calculate the Internal Rate of Return (IRR) for the project, we need to set up the cash flows provided:

- Year 0: -500 (initial investment)
- Year 1: 200 (cash flow)

The IRR is the discount rate that makes the Net Present Value (NPV) of these cash flows equal to zero. The NPV equation based on the cash flows is as follows:

\[
NPV = \sum \frac{CF_t}{(1 + r)^t} = 0
\]

Where:
- \( CF_t \) is the cash flow at time t,
- \( r \) is the IRR, and
- \( t \) is the time period.

For the given cash flows, the equation can be written as:

\[
-500 + \frac{200}{(1 + r)^1} = 0
\]

Now solve for \( r \):

\[
\frac{200}{(1 + r)} = 500
\]
\[
200 = 500(1 + r)
\]
\[
200 = 500 + 500r
\]
\[
500r = 200 - 500
\]
\[
500r = -300
\]
\[
r = -\frac{300}{500}
\]
\[
r = -0.6
\]

So, the project's IRR is \(-0.6\).

Therefore, the answer is **−0.6**.