An investment project requires an initial outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent).

Question

Quizplus · Accepted Answer

Using the formula, 
IRR = Initial investment / Present Value Annuity Factor + Present Value Cash Inflows / Present Value Annuity Factor
IRR = $100,000 / 3.6048 + $28,000 (PVIFA,12%,5) / 3.6048
IRR = $100,000 / 3.6048 + $28,000 (3.6048) / 3.6048
IRR = $100,000 / 3.6048 + $100,547.20 / 3.6048
IRR = $100,000 / 3.6048 + $27,904.58
IRR = $27,904.58 / $72,095.42
IRR = 0.3864 or 38.64%
Therefore, the correct answer is D (12.4%).

An Investment Project Requires an Initial Outlay of $100,000, and Is