Question

Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Do not round intermediate computations

Answer 1

In order to find IRR we have to set the present value of all cash flows to 0,

IRR is the rate at which if we discount the payments the NPV (net present value) will be 0

-1875000+

415,350/(1+IRR)

415,350/(1+IRR)^2

415,350/(1+IRR)^3

415,350/(1+IRR)^4

415,350/(1+IRR)^5

415,350/(1+IRR)^6

415,350/(1+IRR)^7

Now we can use trial and error to see at what rate will the npv be

IRR= 12.35%

Another simple way of doing is using the cash flow function of a financial calculator and input these values.

CF0=1875000

C01=415,350

C02=415,350

C03=415,350

C04=415,350

C05=415,350

C06=415,350

C07=415,350

Step-by-step explanation: