A project produces the following cash flows over the next five years: $600, $200, $350, $400 and $500, respectively. The initial cost of the project is $1,400. What is the internal rate of return on this project?
A) - 4.56%
B) 3.67%
C) 12.87%
D) 14.39%
E) The rate cannot be computed with certainty.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of a project equal to zero. In this case, the NPV is:NPV = -1,400 + 600/(1+IRR) + 200/(1+IRR)^2 + 350/(1+IRR)^3 + 400/(1+IRR)^4 + 500/(1+IRR)^5Setting NPV = 0 and solving for IRR using a financial calculator or spreadsheet, we get IRR = 14.39%.

A Project Produces the Following Cash Flows Over the Next