Luong Machines Company is evaluating an investment of $1,100,000 which will yield net cash inflows of $197,062 per year for 7 years with no residual value. What is the internal rate of return? Present value of ordinary annuity of $1:
$$\begin{array} { | c | c | c | c | c | }
\hline & 5 \% & 6 \% & 7 \% & 8 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.100 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$

Question

Luong Machines Company is evaluating an investment of $1,100,000 which will yield net cash inflows of $197,062 per year for 7 years with no residual value. What is the internal rate of return? Present value of ordinary annuity of $1:
$$\begin{array} { | c | c | c | c | c | } 
\hline & 5 \% & 6 \% & 7 \% & 8 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.100 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$

Quizplus · Accepted Answer

To find the internal rate of return (IRR), we need to match the present value of the annuity to the investment. The investment is $1,100,000, and the annual cash inflow is $197,062 for 7 years. The present value of an annuity can be calculated as the annual cash inflow multiplied by the present value factor for an ordinary annuity. Looking for a factor where multiplying it by $197,062 approximates $1,100,000, the closest match is under the 6% column for 7 years, which is 5.582. Multiplying $197,062 by 5.582 gives approximately $1,100,000, indicating the IRR is around 6%.

Luong Machines Company Is Evaluating an Investment of $1,100,000 Which