Cardinal Inc.purchased an asset costing $25 000.Annual operating cash inflows generated from the asset are expected to be $6595 each year for five years.No salvage value is expected at the end of the asset's life.Using time value of money tables,which of the following rates is closest to the internal rate of return on the project?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. To find the IRR for Cardinal Inc.'s asset, we look for the rate at which the present value of the annual cash inflows over five years equals the initial investment of $25,000. Given the annual cash inflow of $6,595, a rate that brings the present value of these inflows close to the initial investment of $25,000 is approximately 10%. This can be verified using time value of money tables or financial calculators by comparing the present value of an annuity of $6,595 for five years at different rates.