Tranter, Inc., is considering a project that would have a ten-year life and woul

Question

Tranter, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
Sales $ 1,700,000
Variable expenses 1,200,000
Contribution margin 500,000
Fixed expenses
Fixed out-of-pocket cash expenses $200,000
Depreciation 120,000 320,000
Net operating income $ 180,000

All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 12%.


Compute the project's internal rate of return to the nearest whole percent. Ignore income taxes in your computation.

Explanation / Answer

Factor of the IRR =Investment required + Annual net cash inflow $1,200,000 + $300,000 =4.00 Factor To the nearest whole percent, the internal rate of return is 21%

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