Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for four years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the interest rate at which the present value of cash inflows equals the present value of cash outflows.

Using the present value factor for an annuity of $1 for four years at 12%, the present value of the cash inflows is:

$36,000 x 3.037 = $109,332.12

This is close to the cash outlay of $109,332, so the IRR likely lies between 10% and 12%.

Using the present value factors for the other interest rates, we can calculate the present value of the cash inflows as follows:

At 10%: $36,000 x 3.170 = $114,120
At 14%: $36,000 x 2.914 = $104,904
At 15%: $36,000 x 2.855 = $102,780

We can see that the present value of the cash inflows decreases as the interest rate increases. Therefore, the IRR must be higher than 12%, but lower than 14%.

Based on this analysis, the best choice is C) 12%.

Tennessee Corporation Is Analyzing a Capital Expenditure That Will Involve