Question

The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?

Answer 1

Answer:

rate of return is 7.56 %

Explanation:

given data

annual cash flows C1 = $36,800

annual cash flows C2 = $45,500

annual cash flows C3 = $56,200

annual cash flows C4 =  $21,800

initial cost  = $135,000

to find out

internal rate of return

solution

we will apply here initial cost formula for all annual cash flow that is express as

initial cost = $\frac{C1}{(1+r)} +\frac{C2}{(1+r)^2} +\frac{C3}{(1+r)^3} +\frac{C4}{(1+r)^4}$     .......................1

here C is annual cash flow and r is rate of return

put here value and we get r

initial cost = $\frac{C1}{(1+r)} +\frac{C2}{(1+r)^2} +\frac{C3}{(1+r)^3} +\frac{C4}{(1+r)^4}$

135000 = $\frac{36800}{(1+r)} +\frac{45500}{(1+r)^2} +\frac{56200}{(1+r)^3} +\frac{21800}{(1+r)^4}$

solve it and we get

r = 0.0756

so rate of return is 7.56 %