The annual risk-free rate is 4%, while the risk premium for projects with a similar level of risk is 6%. 22.22% is the project's IRR.
The internal rate of return (IRR), a statistic used in financial research, is used to determine the profitability of potential investments. IRR is a discount rate that brings all cash flows' net present values (NPV) to zero in a discounted cash flow analysis.
Since we use an annual discount rate to compute the IRR, there is only one IRR for each project even if the cash flows may vary.
Internal Rate of Return Calculation
C = Cash Flow at time t.
IRR = A decimal representation of the discount rate or internal rate of return.
t = time period.
Internal rate of return (IRR)
= $100/$90 - 1
= 22.22%
To learn more about IRR
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