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Ch7 IRR Handout

# Ch7 IRR Handout - Pays\$ Bondlife:10yrs Soldat9yearsfor\$950...

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IRR 10 yr corporate bond Pays \$40 interest every 6 months Bond life: 10 yrs Sold at 9 years for \$950 Find IRR 1) Initial screening Benefits = \$40 x 18 + 950 = \$1,670 > \$1000 continue 2) Set up equations PW costs = -\$1,000 PW benefits = A (P/F, i, n 1 ) + A (P/F, i, n 2 ) + A (P/F, i, n 3 ) + … + (A+S) (P/F, i, N) = 40 (P/F, i, 1) + 40 (P/F, i, 2) + 40 (P/F, i, 3) + … + 990 (P/F, i, 18) NPW = PW benefits – PW costs = 0 NPW 3) Find root, i* Trial and error i NPW 0% 670 5% 138 4% 25 3.5% -39 Interpolate

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A B C D E F G Yr Cash Flow PW
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