A company is considering an iron ore extraction project that requires an initial investment of $1,400,000 and will yield annual cash inflows of $613,228 for three years. The company's discount rate is 9%. Calculate IRR. Present value of ordinary annuity of $1:
$$\begin{array} { | r | r | r | r | r | r | r | r | }
\hline & 10 \% & 12 \% & 14 \% & 15 \% & 16 \% & 18 \% & 20 \% \
\hline 1 & 0.909 & 0.893 & 0.877 & 0.870 & 0.862 & 0.847 & 0.833 \
\hline 2 & 1.736 & 1.690 & 1.647 & 1.626 & 1.605 & 1.566 & 1.528 \
\hline 3 & 2.487 & 2.402 & 2.322 & 2.283 & 2.246 & 2.174 & 2.106 \
\hline 4 & 3.170 & 3.037 & 2.914 & 2.855 & 2.798 & 2.690 & 2.589 \
\hline
\end{array}$$

Question

A company is considering an iron ore extraction project that requires an initial investment of $1,400,000 and will yield annual cash inflows of $613,228 for three years. The company's discount rate is 9%. Calculate IRR. Present value of ordinary annuity of $1:
$$\begin{array} { | r | r | r | r | r | r | r | r | } 
\hline & 10 \% & 12 \% & 14 \% & 15 \% & 16 \% & 18 \% & 20 \% \
\hline 1 & 0.909 & 0.893 & 0.877 & 0.870 & 0.862 & 0.847 & 0.833 \
\hline 2 & 1.736 & 1.690 & 1.647 & 1.626 & 1.605 & 1.566 & 1.528 \
\hline 3 & 2.487 & 2.402 & 2.322 & 2.283 & 2.246 & 2.174 & 2.106 \
\hline 4 & 3.170 & 3.037 & 2.914 & 2.855 & 2.798 & 2.690 & 2.589 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The IRR is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. Given the initial investment of $1,400,000 and annual cash inflows of $613,228 for three years, we look for the discount rate that equates the present value of these inflows to the initial investment. Using the provided table, we find the present value factor closest to the ratio of the initial investment to the annual cash inflows ($1,400,000 / $613,228 ≈ 2.283). This factor corresponds to a 15% discount rate for a 3-year annuity, indicating that the IRR is approximately 15%.

A Company Is Considering an Iron Ore Extraction Project That