A project requires an initial investment of $100 000 and immediately pays $25 000. The next year this project requires an additional investment of $50 000 and does not pay anything. In the following year the project pays $150 000. The internal rate of return (i)for this project can be obtained by
A)using a present worth factor.
B)solving a quadratic equation.
C)calculating an external rate of return.
D)solving a system of two equations.
E)solving an ith degree polynomial equation.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is found by setting the net present value (NPV) of all cash flows to zero and solving for the discount rate (i). In this case, the cash flows create a quadratic equation when set to zero, because the cash flows occur at different times and the equation involves $i^2$ when calculating the present value of future cash flows.

A Project Requires an Initial Investment of $100 000 and Immediately