I am trying to figure out the IRR to see if this project is acceptable or unacceptable based on the ARR that I already figured out. Per my professor he mentioned something about "guessing" I think. Based on my template I'm having trouble figuring out year 5. Please advise based on my attachment, which I'm almost done with except for year 5. Not sure what I'm doing wrong. I'm not able to attach the file, so not sure what is the problem. Below is what I pasted from excel


Part 5 Internal Rate of Return

Excel Function method to calculate IRR
This function REQUIRES that you have only one cash flow per period (period 0 through period 5 for our example)
This means that no annuity figures can be used. The chart for our example can be revised as follows:

After Tax
Item Year Amount
Cost of machine 0 $(200,000)
Year 1 inflow 1 $58,351
Year 2 inflow 2 $58,351
Year 3 inflow 3 $58,351
Year 4 inflow 4 $58,351
Year 5 inflow 5

The IRR function will require the range of cash flows beginning with the initial cash outflow for the investment
and progressing through each year of the project. You also have to include an initial "guess" for the
possible IRR. The formula is: =IRR(values,guess)

IRR Function IRR(F78.. F83, 30) 6.5%

What exactly are you trying to determine? The IRR of the cash flow layout that you've presented is indeed 6.5% after a bit o' rounding. (By the way, Excel's IRR function sometimes needs a little nudge with a "guess" parameter in the arguments, but it isn't always required. Excel returned 6.4777... % for me with just =irr([array]) all on its own; the guess argument is optional. XL's help function indicates that it uses 0.10 as a default starting point if you choose not to include a guess.)

Anyway, back to the question; you mention you're having trouble "figuring out Year 5". Are you trying to determine a terminal-year cash flow that will cause the project to have some target yield (IRR)?

Quote:

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Originally Posted by ArcSine

What exactly are you trying to determine? The IRR of the cash flow layout that you've presented is indeed 6.5% after a bit o' rounding. (By the way, Excel's IRR function sometimes needs a little nudge with a "guess" parameter in the arguments, but it isn't always required. Excel returned 6.4777...% for me with just =irr([array]) all on its own; the guess argument is optional. XL's help function indicates that it uses 0.10 as a default starting point if you choose not to include a guess.)

Anyway, back to the question; you mention you're having trouble "figuring out Year 5". Are you trying to determine a terminal-year cash flow that will cause the project to have some target yield (IRR)?

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I was trying to determine the amount for year 5 and I think now I need to add the salvage value for year 5, which is $40,000 added to the $58,351, which gives me $98,351 with a IRR of 18% compared to my ARR that I figured out earlier of 13.18%, so I'm hoping the year 5 dollar amount of $98,351 is correct. I need that correct amount of course to compare against the ARR to see if the project is accepatable or unacceptable

Roger. Sounds like you're on the right track with it. If you're given a salvage value, that amount would indeed be added to any other cash flows for the terminal year, for purposes of the IRR calc.