Edison Electric Systems is considering a project that has th

Edison Electric Systems is considering a project that has the following cash flow data. What is the project\'s IRR? Note that a project\'s projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

         Year:            0     1       2       3  

         Cash flows:   -$1,000 $450     $470     $490

a. 16.73%

b. 17.44%

c. 18.89%

d. 19.05%

e. 20.37%

Solution

NPV=-1000+(450/(1+IRR)¹)+(470/(1+IRR)²)+(490/(1+IRR)³)=0

since at IRR NPV=0

If IRR=18.89%=.1889

NPV=-1000+(450/(1.1889)¹)+(470/(1.1889)²)+(490/(1.1889)³)

NPV=-1000+(378.50113)+(332.51190)+(291.58159)=2.59

If IRR=19.05%=.1905

NPV=-1000+(450/(1.1905)¹)+(470/(1.1905)²)+(490/(1.1905)³)

NPV=-1000+(377.992440)+(331.618735)+(290.4075352)=0.01~0 is becoming 0.

Thus IRR is d. 19.05% at which NPV becomes 0.