Freeley Co. is considering an expansion project costing $390,000 up front. The expansion is expected to produce cash flows of $120,000 a year for two years. In Year 3, the project is expected to produce a cash flow of $225,000. The expected return on this expansion project is:
A) 7.12%
B) 8.16%
C) 8.33%
D) 8.51%
E) 8.47%

Question

Quizplus · Accepted Answer

The expected return is calculated using the internal rate of return (IRR) method. The IRR is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. By calculating the IRR for the given cash flows, we find it to be approximately 8.33%.