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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Business

Damien Barr

18 December, 16:36

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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Bobby Hammond · 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%