A four-year project requires $1 000 000 as the first cost and brings $2 000 000 at the end of the fourth year. If expected annual inflation over this period is 5%, what is the real IRR of this project?
A)13.3%
B)18.9%
C)27.6%
D)47.6%
E)95.0%

Question

Quizplus · Accepted Answer

The real IRR can be calculated by adjusting the nominal IRR for inflation using the formula: (1 + nominal IRR) = (1 + real IRR) * (1 + inflation rate). Given the nominal IRR can be found by solving for the IRR in the cash flow equation: -1,000,000 + 2,000,000 / (1 + IRR)^4 = 0. Solving this equation gives a nominal IRR of approximately 18.9%. Using the inflation rate of 5%, we can rearrange the formula to solve for the real IRR: (1 + real IRR) = (1 + nominal IRR) / (1 + inflation rate) = (1 + 0.189) / (1 + 0.05) ≈ 1.133, which gives a real IRR of approximately 13.3%.

A Four-Year Project Requires $1 000 000 as the First