Problem 8-8 Calculating IRR [LO 3] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

Problem 8-8 Calculating IRR [LO 3]

Consider the following cash flows:

Year	Cash Flow
0		–$	32,000
1			14,200
2			17,500
3			11,600

Required:

What is the IRR of the above set of cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return

%

Explanation:

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = – $32,000 + $14,200 / (1 + IRR) + $17,500 / (1 + IRR)2 + $11,600 / (1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 17.32%

   

Calculator solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$32,000
C01	$14,200
F01	1
C02	$17,500
F02	1
C03	$11,600
F03	1
IRR CPT
17.32%