Busn 379 finance Project (v2 Part 2)

The Internal Rate of Return (IRR) is the discount rate that makes the present value of a project’s future cash flows equal to its initial cost. We need to determine the rate of return required and the cost of the machine in order to calculate IRR. This case has the 15% required rate of return and $3,000,000 initial cost.

We can employ an iterative method to calculate IRR for the project. We can use an iterative approach to calculate IRR for this project. The first is to identify the possible range of IRR using either our sectoral or general knowledge. We then gradually narrow down our search by testing different rates until we are able to obtain a satisfactory result indicating successively closer values each time until one reaches very close proximity/convergence with its actual value as per desired accuracy.

Start with 10% and increase by 5%, 15%, 20%, 25% and so on until we reach convergence at around 15%. To ensure that investment returns equal the risk-adjusted minimum return, we will keep adding 5% to NPV until it reaches 0 (or close enough). After this point is reached, the IRR can then be calculated.

IRR = Cost +Net Present Value/Initial Investment

= 3000000 + 0 / 3000000

= 15 %

Therefore, based on these calculations, our project’s Internal Rate of Return (IRR) would be equal to 15%.