Glades Thread Company is evaluating an investment that will cost $760,000 and wi

ID: 2592760 • Letter: G

Question

Glades Thread Company is evaluating an investment that will cost $760,000 and will yield cash flows of $%255,000 in the first year, $360,000 in the second year, and $380,000 in the third and the final year. Use the table below and determine the internal rate of return. Present value of $1: 890 9% 10% 11% 12% 1 0.926 0.917 0.909 0.901 0.893 2 0:57 0.842 026 0812 0797 3 0.794 0.772 0.751 0.731 0.712 4 0.735 0.708 0.683 0.659 0.636 5 0.681 0.65 0.621 0.5930.567 The IRR of the project will be Select one: A. between 10% and 11% B. more than 11% C. less than 9% D. less than 10% more than 9%

Explanation / Answer

Correct answer is B

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Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.

Year

Cash flow

-760000

255000

360000

380000

7000

IRR

14.10%

Formula

=IRR(J21:J31)

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Hope that helps.

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