Such that when we discount all of our free cash flows, we get an NVP of zero.
If we do that, we find that the IRR on this project is 43.7%.
Well, is that good, is it bad?
Before getting there,
I just want to mention, typically we're going to need to solve this numerically,
unless you have figured out some amazing way to solve higher order polynomials.
You can use the IRR function in Excel, I think you can use goal seek in Excel,
you can try trial and error, though that's really inefficient.
If you're using another software program or a financial calculator,
you can do this as well.
All right, so what do we do with this 43.7% IRR?
Well, we're going to compare it to our cost of capital, our hurdle rate.
And what we're going to do is undertake the project because the IRR is greater
than the hurdle rate.
Intuitively, it makes sense.
And this is one of those cases where intuition actually works.
It costs us 12% to raise money in the capital markets to fund
our investments, to create value.
If this project generates a return of 43.7%,
that's substantially larger than what it costs us to raise the funds.
That sounds good, that makes sense.
And so what the IRR Rule says is accept all projects whose IRR greater than R and
reject all projects whose IRR less than R, where R is our hurdle rate.
Hurdle rate cost of capital, our discount rate.