A municipality decided to invest $500 000 in a four-year project. To decide whether the project should be undertaken, a city engineer was asked to run a financial analysis. Carrying out the analysis in actual dollars, the engineer found that by its very end the project would just break even. If inflation is expected to be 4.0% per year, what is the real IRR?

Question

Quizplus · Accepted Answer

The real IRR is calculated by adjusting the nominal IRR for inflation. Since the project breaks even in nominal terms, the nominal IRR is 0%. Adjusting for 4% inflation, the real IRR is approximately -3.8%.

A Municipality Decided to Invest $500 000 in a Four-Year