EIT-M

MEKELLE UNIVERSITY
School of Mechanical and Industrial Engineering

Program- MSc in Production and Industrial System Engineering

Course Name and Code Advanced Industrial Project Management (IEng 6103)

Individual Assignment One

Submitted by

GETAHUN SORSA

ID No = EITM/PR136389/10

Submitted to: HAILEKIROS S. (PHD)

Submission Date: Nov 15, 2017

MEKELLE, ETHIOPIA
 1. The cash flow of a given project is shown below.
A). What is IRR value?
B). Is this project worth perusing if the interest rate 12%

Solution: A)

The general formula to calculate Internal Rate of Return is

A0 + A1/(1 + k ) + A2/(1 + k )2 ++ An/(1 + k )n + = R1/(1 + k ) + R2/(1 + k )2 + + Rn/(1 + k )n

To calculate the IRR value we can use different methods like straightforward process, although it
requires tables representing present value of an annuity in order to determine the projects rate of
return. Alternatively, we can use computer program (BTAX2) and pocket calculators (equation
solver) to determine IRR quickly. Without such tables, computer program or access to a
calculator, it is necessary to employ an iterative process to identify the approximate IRR for the
project. For my case I have used simple iterative method for calculating approximate Internal
Rate of Return (IRR).

Let us arbitrarily try a zero discount rate. This gives the Net Present Value (NPV) of 4000.
250 500 750 1000 1250 1500 1750
+ + + + + + - 3000 = 7000 3000 = 4000
(1) (1)2 (1)3 (1)4 (1)5 (1)6 (1)7

With a zero discount rate the NPV is positive. So the IRR must be greater than zero.

By substituting the given data in above equation and trying for k = 20% it yields:
250 500 750 1000 1250 1500 1750
+ + + + + + - 3000 = 0
(1+0.2) (1+0.2)2 (1+0.2)3 (1+0.2)4 (1+0.2)5 (1+0.2)6 (1+0.2)7

2964 3000 = 0

= -36

NPV is now negative. So the IRR must lie somewhere between zero and 20 percent. Therefore
let take another value less than 20% to find the value of IRR.
 For k = 19.6%
250 500 750 1000 1250 1500 1750
+ + + + + + - 3000 = 0
(1.196) (1.196)2 (1.196)3 (1.196)4 (1.196)5 (1.196)6 (1.196)7

3009 3000 = 0

= +9

The present value difference at 19.6% is +9 which is also high, therefore let take another value
greater than 19.6 %to make the difference less than 9.

For k = 19.65%
250 500 750 1000 1250 1500 1750
+ + (1.1965)3 + + + + - 3000 = 0
(1.1965) (1.1965)2 (1.1965)4 (1.1965)5 (1.1965)6 (1.1965)7

3003 3000 = 0

= +3

The present value difference at 19.65% is 3. Let take another value greater than 19.65% to make
the difference less than 3.

For k = 19.68%
250 500 750 1000 1250 1500 1750
+ + + + + + - 3000 =
(1.1968) (1.1968)2 (1.1968)3 (1.1968)4 (1.1968)5 (1.1968)6 (1.1968)7
0

3000.08 3000 = 0

= 0.08

The present value difference at 19.68% is 0.08 which suggest that 19.68% a close approximate
value of IRR.

B). The project is worth perusing because the calculated approximate IRR value 19.68% is
greater than that of required rate of return which is 12%.