Math Problem Statement

A firm is considering two projects, A and B. Each project will last for 4 years. The projects are MUTUALLY EXCLUSIVE. The projected cash flows for each project are shown below:

Year01234

Project A

-20.00

9.00

8.00

6.00

4.00

Project B

-30.00

10.00

12.00

11.00

13.00

The cost of capital facing the firm is 9.00%.

What is the IRR of project A?

Solution

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Math Problem Analysis

Mathematical Concepts

Internal Rate of Return (IRR)
Discounted Cash Flow (DCF)
Net Present Value (NPV)

Formulas

NPV = Σ (Cash Flow at time t / (1 + r)^t) for t = 0 to n
IRR: NPV = 0, solve for r

Theorems

Time Value of Money

Suitable Grade Level

College level, Finance or Economics