Question

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is a. 9% b. 10% c. 12% d. 3%

Answer 1

The internal rate of return for this investment is 12%

Option C

Solution:

PV of Cash Outlay = PV of Cash Inflow

109332 = 36000*PVIFA (Rate,4)

PVIFA(rate,4) = 109332/36000

PVIFA(rate,4) = 3.037

The present value factors for an annuity of $1 for 4 years at interest of 12% is 3.037

So IRR = 12%