Answer to Question 4

Demonstrate that the the following project has internal rates of return of 0%, 100% and 200%
Year
Cash Flow

1
(1,200)

2
7,200

3
(13,200)

4
7,200

Answer
To demonstrate that an IRR calculation is valid, we compute the net present value at the
IRR. A valid IRR yields NPV = 0.
Year
Cash Flow PV@0% PV@100% PV@200%
1
(1,200)
(1,200)
(600)
(400)
2
7,200
7,200
1,800
800
3
(13,200) (13,200)
(1,650)
(489)
4
7,200
7,200
450
89
Total
$0.00
$0.00
$0.00
IRR =
0%
100%
200%

100% and 200%