The Balistan Rug Company is considering investing in a new loom that will cost $12,000. The new loom will create positive end of year cash flow of $5,000 for the next 3 years. The internal rate of return for this project is:
A) between 10% and 15%.
B) between 15% and 20%.
C) between 20% and 25%.
D) between 25% and 30%.
E) less than 10%.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the cash flows are $5,000 for each of the next 3 years, and the initial investment is $12,000. Without calculating the exact IRR, we can estimate it by recognizing that the total cash inflow ($15,000 over 3 years) is more than the initial investment ($12,000), but not by a huge margin. The IRR must be positive but not extremely high, placing it in the range of between 10% and 15%.

The Balistan Rug Company Is Considering Investing in a New