Project M requires an initial investment of $25 million. The project is expected to generate $2.25 million in after-tax cash flow each year forever. Calculate the IRR for the project.
A)10 percent
B)9 percent
C)8 percent
D)7 percent

Question

Quizplus · Accepted Answer

To calculate IRR, we need to find the discount rate which makes the net present value (NPV) of the investment equal to zero. In this case, we can use the perpetuity formula to calculate the NPV:

NPV = -25 + 2.25 / r

where r is the discount rate. Setting NPV = 0 and solving for r gives:

0 = -25 + 2.25 / r
25 = 2.25 / r
r = 2.25 / 25 = 0.09 = 9%

Therefore, the IRR for the project is 9 percent.

Project M Requires an Initial Investment of $25 Million