Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. The company uses a discount rate of 12% and the initial investment is $750,000. The following table is available:
Present Value of $1: The IRR of the project will be:

Question

Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. The company uses a discount rate of 12% and the initial investment is $750,000. The following table is available:
Present Value of $1:  The IRR of the project will be:

Quizplus · Accepted Answer

To find the IRR of the project, we need to calculate the NPV of the cash inflows at different discount rates and find the rate at which the NPV equals zero.

Using the Present Value of $1 table, the NPV of the cash inflows at a discount rate of 12% is:

Year 1: $250,000 / (1+0.12)^1 = $223,214.29
Year 2: $350,000 / (1+0.12)^2 = $276,426.11
Year 3: $395,000 / (1+0.12)^3 = $284,330.52

NPV = -$750,000 + $223,214.29 + $276,426.11 + $284,330.52 = $33,970.92

Since the NPV is positive, the IRR is greater than 12%. To find the exact rate, we can interpolate using the table:

Discount Rate  | NPV
12%            | $33,970.92
13%            | $8,626.97
IRR = 12% + [($750,000 - $33,970.92) / ($33,970.92 - $8,626.97)] x (13% - 12%) = 14.10%

Therefore, the IRR of the project is between 14% and 15%. The best choice is C.

Gamma Company Is Considering an Investment Opportunity with the Following