Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.

Year Cash flows
0 −$1,250
1 $325
2 $325
3 $325
4 $325
5 $325

a. 9.43%
b. 9.91%
c. 10.40%
d. 10.92%
e. 11.47%

a. 9.43%

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator.

Cash flow in year zero = −$1,250 

Cash flow each year from year one to five = $325

IRR = 9.43%

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

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