9 The IRR is now 16.02%. Our rate of return went up slightly because we paid less for the same cash flow. 0 1 Conversely, if we pay $1,100,000, we will see that our IRR goes down. Change cell b40 to -1,100,000. 2 The IRR has now gone down to 13.38%, or unrounded 13.37835881%. (Just change the rounding if you want to see this number.) 3 4 Please use your financial calculator to calculate the IRR of our projected cash flow stream using 5 the $1,000,000, then the $1,100,000 purchase price. 6 Here is a video tutorial for calculating IRR. 7 8 9 Purchase Price Cfo -1100000 (Note: This is negative!) 0 Year 1 C01 $100,000 1 Year 2 CO2 $120,000 2 Year 3 CO3 $140,000 3 Year 4 C04 $155,000 4 Year 5 C05 $1,365,000 5 IRR with $1,000,000 purchase price = 6 IRR with $1,100,000 purchase price = 7 8 Think about these steps in this order. 9 1) We determined the PV of the projected cash flows using an acceptable discount rate. o 2) We then calculated the IRR using the original future cash flows, along with PV as the purchase price. 1 3) We then lowered the purchase price and saw that the IRR went up. 2 4) We also increased the purchase price and saw that the IRR went down. 3 4 In other words, if the purchase price is more than $1,037,014, the IRR will be less than 15%. 5 If the purchase price is less than $1,037,014, the IRR will be greater than 15%. 6 If the purchase price is exactly $1,037,014, what will the IRR be? 7 8 Let's see if we can tie NPV and IRR together using a discount rate. 9 o First, review your work above and find the PV we calculated using a 15% discount rate. 1 2 Now, calculate the PV using a 13.37835881% discount rate. 3 PV 4 Year 1 $100,000 88200.2536