Internal Rate of Return A project is estimated to cost $74,035 and provide annua

Question

Internal Rate of Return

A project is estimated to cost $74,035 and provide annual net cash flows of $17,000 for six years.

Determine the internal rate of return for this project, using the Present Value of an Annuity of $1 at Compound Interest table shown above.

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

From the given Information:

                              Project cost/ Cash outflow = $ 74,035

                             Annual cash inflows = $ 17,000

                           Net present value(NPV) of cash inflows @ 10%, 6 years = 17,000* 4.355 = $ 74,035

         Since, present value of cash outflows = present value of Annual cash inflows, NPV @ 10% becomes

                   Internal rate of return (IRR) for this project.

         Therefore, Internal rate of return = 10%.

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