There is an investment proposal consisting of a new more effective, oil pump that will remove a fixed quantity of oil out of the ground more quickly than our existing pump. It requires an initial outflow of $1,600 for the new pump. The incremental net cash flows for this investment are:
Year 0 Year 1 Year 2
-$1,600 $10,000 -$10,000
Calculate the IRR for this project if the cost of capital is 10%? If you are having a situation of multiple internal rate of return in this investment than how will it be resolved?
The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. Using Excel formula "IRR" the IRR for this project is 25%, at this discount rate NPV = 0.