For the cash flows shown, determine:

(a) the number of possible i* values
(b) the i* value displayed by the IRR function
(c) the external rate of return using the MIRR method if ii = 18% per year and ib = 10% per year.


First find net cash flow (NCF)



(a) Rule of signs test: up to 3 values

Cumulative CF sign test: 3 changes; no unique, positive i*



(b) Function: = IRR(B1:B5) displays i* = 39.9%



(c) PW0 = -6000 - 5000(P/F,10%,1) - 2000(P/F,10%,3)

= -6000 - 5000(0.9091) - 2000(0.7513)

= $-12,048

FW4 = 12,000(F/P,18%,2) + 16,000

= 12,000(1.3924) + 16,000

= $32,709



-12,048(F/P,i',4) + 32,709 = 0

-12,048(1 + i')4 + 32,709 = 0



i' = (32,709/12,048)^1/4 – 1

= 0.284 (28.4%)

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