Tressor Company is considering a 5-year project.The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000.The company requires that investments yield a discount rate of at least 14%.Selected factors for a present value of an annuity of $1 for five years are shown below: Calculate the internal rate of return to determine whether it should accept this project.

Question

Tressor Company is considering a 5-year project.The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000.The company requires that investments yield a discount rate of at least 14%.Selected factors for a present value of an annuity of $1 for five years are shown below:  Calculate the internal rate of return to determine whether it should accept this project.

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate at which the net present value (NPV) of the cash flows is equal to zero. Using the present value of an annuity table, we can find that the present value of the cash flows is $27,000 x 3.6048 = $97,341.60. Therefore, the NPV of the project is $97,341.60 - $90,000 = $7,341.60. To find the IRR, we can use trial and error or Excel's IRR function. Using the latter method, we find that the IRR is 16.12%, which is greater than the required rate of return of 14%. Therefore, the project should be accepted because it will earn more than 14%.

Tressor Company Is Considering a 5-Year Project