"Corporate Finance":Internal rate of return

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Questions 1:

A firm is considering a project that would require an initial investment of THB270 million (Thai baht). The project will help increase the firm’s after-tax net cash flows by THB30 million per year in perpetuity, and it is found to have a negative NPV of THB20 million. The IRR (%) of the project is closest to:

A、 11.1%.

B、 10.3%.

C、 12.0%

Questions 2:

A project has the following annual cash flows:

Corporate Finance:Internal rate of return

Which discount rate most likely provides a positive net present value (NPV)?

A.、 15%

B 、21%

C、 18%

View answer resolution

【Answer to question 1】A

【analysis】

A is correct. The IRR is the discount rate that makes the NPV = 0. Because the cash flow stream is in perpetuity, it can be solved as follows: 0 = –270 + (30/IRR) IRR = 11.1%

B is incorrect. It assumes a positive NPV of 20 and solves for IRR = 30/290 = 10.34%.

C is incorrect. It assumes a negative NPV of 20 and solves for IRR = 30/250 = 12.00%.

【Answer to question 2】B

【analysis】

B is correct.

Corporate Finance:Internal rate of return