Question

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $757,600. What is the internal rate of return of this project?

Answer 1

The rate of return of the project is 30.36%

Explanation:

Cash flow generated for the first three years= $ 237,600 each of the three year

Cash flow generated for the 4th year= $ 274,800

Initial cost of the project= $ 757,600  

The return rate of the project?

For finding the return rate of the project, we need to find the total cash flow generated by the project for the complete period (i.e. 4 years)

⇒Total cash flow generated= cash flow for 3 years+ cash flow for 4th year

⇒$ (237,600*3) +$ 274,800

⇒$ 987,600

Return from the investment=$ 230,000

⇒Rate of return= (return/total investment) *100

Substituting the values-

⇒(230,000/757,600) *100

⇒30.36%  

The rate of return of the project is 30.36%