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Hello Sir
Could you please advise on below question.A project requires an investment of $24000 at time 0 and generate an inflow of $5000 per year for 8 years. With inflow occurring in one year time. What is IRR?
I am not getting answer of 13%. Please advise.
IRR with even cash flows……ok here we go ,
Year narrative CF DF(you have to find this) P.V
0 initial investment (24000) 1 (24000)
1-8 cash inflows 5000 (a) 24000
————-
xand now to find the discount rate for cash inflows i.e (a) divide 24000 with 5000 which gives you 4.8 now look up the annuity table where this value lies in 8 years which is ummm yes 13% (4.799 is 4.8 after rounding off 🙂
You can make two guesses, but not only would this take longer, but it would (of course) only be an approximation.
I know what you mean, although you can always use the formula. It is just that as we both have written, it is quicker and more accurate to use the annuity factor when it is an annuity.
(Mind you, I never use a formula anyway. You don’t need to learn a formula if you do it the way I do it in the lectures when there are unequal cash flows 🙂 )
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