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Hi Mr. John
I find this question quite tricky. I understand the definition of IRR is the rate at which NPV is zero and I understand the calculation in this question but I do not arrive at zero if you know what I mean. Please be kind enough and explain this question to me detail.
A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the expected net cash inflows from the machine over its useful life are:
Discount rate Present value of cash inflows
What is the internal rate of return (IRR) of the machine investment?
A Below 10%
B Between 10% and 15%
C Between 15% and 20%
D Over 20%
The NPV at 10% is +$4,600, at 15% is – $1,800 (and at 20% is – $7,900, but this is irrelevant),
For an NPV of zero the IRR must therefore be somewhere between 10% and 15%.
Have you watched my free lectures on this?