The capital budgeting director of Sparrow Corporation is evaluating a project which costs $200,000,is expected to last for 10 years and produce after-tax cash flows,including depreciation,of $44,503 per year.If the firm's required rate of return is 14 percent and its tax rate is 40 percent,what is the project's IRR?

Question

Quizplus · Accepted Answer

To find the project's internal rate of return (IRR), we need to solve for the discount rate that makes the present value of the project's cash inflows equal to its initial cost. Using a financial calculator, we can find that the present value of the project's cash inflows is $406,811. Therefore, we need to solve the following equation for i:

$200,000 = $44,503 / (1 + i) + $44,503 / (1 + i)^2 + ... + $44,503 / (1 + i)^10

Solving for i, we find that the project's IRR is approximately 18%. Therefore, the best choice is C) 18%, which is the project's IRR.

The Capital Budgeting Director of Sparrow Corporation Is Evaluating a Project