Internal Rate of Return A project is estimated to cost $491,216 and provide annu

Question

Internal Rate of Return A project is estimated to cost $491,216 and provide annual net cash flows of $88,000 for seven years. Present Value of an Annuity of $1 at Compound Interest Year6% 10% 12% 15% 20% 10.943 0.909 0.8930.8700.833 1.528 3 2.673 2.4872.402 2.283 2.106 4 3.465 3.1703.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 6 4.917 4.3554.111 3.784 3.326 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.9684.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.3606.145 5.650 5.019 4.192 , 1.8331.7361.690 1.626 mine the internal rate of return for this project, using the Present Vale of am Annuity of st at Compound Interest table shown above.

Explanation / Answer

For calculation of internal rate of return we have to equate present value of inflow of cash should be equal to present value of outflow. In other words,internal rate of return is the rate at which NPV is zero.

As in the given case i have assume internal rate of return is 6%.

Present value of outflow= present value of inflow

$491216=Present value of inflow $88000 for seven years.

By discounting inflow at6%,

Present value annuity factor(PVAF)=PVAF(6%,7) =5.582

Present value of inflow at 6%=annual inflow ×PVAF =88000×5.582=$491216.

Hence the present value of outflow is equal to present value of inflow at 6%.and 6% will be the rate of internal rate of return.

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