Question

Blinding Light Company has a project available with the following cash flows:

Year Cash Flow
0 −$ 34,590
1 8,060
2 9,690
3 13,770
4 15,730
5 10,520
What is the project's IRR?


Multiple Choice

16.51%


19.11%


18.34%


19.87%


20.38%

Answer 1

To calculate the Internal Rate of Return (IRR) for the project, we need to find the rate \( r \) that will make the Net Present Value (NPV) of the cash flows equal to zero. The cash flows for the project are:

- Year 0: -$34,590
- Year 1: $8,060
- Year 2: $9,690
- Year 3: $13,770
- Year 4: $15,730
- Year 5: $10,520

The NPV formula is:

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

Where \( CF_t \) is the cash flow at time \( t \) and \( r \) is the discount rate (which we are trying to find). Setting NPV to 0 gives us the equation to solve for \( r \):

\[
0 = -34,590 + \frac{8,060}{(1 + r)^1} + \frac{9,690}{(1 + r)^2} + \frac{13,770}{(1 + r)^3} + \frac{15,730}{(1 + r)^4} + \frac{10,520}{(1 + r)^5}
\]

To solve for \( r \) (IRR) typically requires iterative numerical methods or financial calculators/software because the equation is nonlinear.

Using a financial calculator or software that computes IRR:

- Input the cash flows
- Year 0: -34,590
- Year 1: 8,060
- Year 2: 9,690
- Year 3: 13,770
- Year 4: 15,730
- Year 5: 10,520

Upon calculation, the IRR for these cash flows is found to be **19.11%**.

Thus, the correct answer is:

**19.11%**