The initial cash outlay (in year 0) and resulting cash inflows for three competing projects are presented below. Calculate the internal rate of return for each project (1-3) below using a formula in Excel. Which project would you choose? What if you only had $12,000 in year 0, and the cost of borrowing additional money was prohibitively high?
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Project 1 |
Project 2 |
Project 3 |
| Year 0 |
$ (8,000) |
$ (25,000) |
$ (10,000) |
| Year 1 |
$ 3,000 |
$ 1,000 |
$ 1,000 |
| Year 2 |
$ 3,000 |
$ 3,000 |
$ 2,000 |
| Year 3 |
$ 3,000 |
$ 8,000 |
$ 3,000 |
| Year 4 |
n/a |
$ 10,000 |
$ 4,000 |
| Year 5 |
n/a |
$ 20,000 |
$ 5,000 |
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| IRR |
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Using the same IRR formula, calculate the internal rate of return for project 4. Why is the result an error?
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Project 4 |
| Year 0 |
$ 5,000 |
| Year 1 |
$ 1,000 |
| Year 2 |
$ 2,000 |
| Year 3 |
$ 3,000 |
| Year 4 |
$ 4,000 |
| Year 5 |
$ 5,000 |
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| IRR |
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