Butner Inc.requires all capital investments to generate an internal rate of return of 16 per cent.The company is considering an investment costing $80 000 that is expected to generate equal,annual cash inflows for 5 years.The equal,cash inflows are expected to be:

Question

Quizplus · Accepted Answer

To find the internal rate of return (IRR), we can use the formula:
NPV = 0 = -C + (CF1/(1+IRR)^1) + (CF2/(1+IRR)^2) + ... + (CFn/(1+IRR)^n)
where:
C = initial cash outflow (cost of investment)
CF = cash inflow for each period
n = number of periods

We know that the IRR should be 16%, so we can plug in the values and solve for the unknown cash inflows (CF).

0 = -80,000 + (CF/1.16) + (CF/1.16^2) + (CF/1.16^3) + (CF/1.16^4) + (CF/1.16^5)

Solving this equation gives us CF = $24,433. Therefore, the best choice is A, with annual cash inflows of $24,433 for 5 years, which will generate an IRR of exactly 16%.