Internal Rate of Return A project is estimated to cost $265,278 and provide annu

ID: 2589966 • Letter: I

Question

Internal Rate of Return A project is estimated to cost $265,278 and provide annual net cash flows of $39,000 for nine years.

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

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

Let irr be x%
At irr,present value of inflows=present value of outflows.

265278=39000/1.0x+39000/1.0x^2+..............+39000/1.0x^9

(265278/39000)=[1/1.0x+1/1.0x^2+,................+1/1.0x^9]

[1/1.0x+1/1.0x^2+,................+1/1.0x^9]=6.802

Hence looking at present value of annuity factor(6%,9 years);we get IR=6%

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