Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion

Question

Denisse

Business

19 August, 17:17

Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion

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Alisa Richmond · Answer 1

23.12%

Explanation:

Internal rate of return (IRR) is the rate at which the Net present value (NPV) of a project equals to zero.

Using a financial calculator and the CF function, input the following to find IRR;

Initial investment; CF0 = - 1,200,000

Yr1 cashflow inflow; C01 = 235,000

Yr2 cashflow inflow; C02 = 412,300

Yr3 cashflow inflow; C03 = 665,000

Yr4 cashflow inflow; C04 = 875,000

Then key in IRR CPT = 23.119%

Therefore, the Internal rate of return this expansion is 23.12%