Tony Corp. plans to invest $1 million in a project. It expects to sell the project at the end of three years, for proceeds equal to approximately $1,158,000. Which of the following is closest to the internal rate of return?
A) 0.01
B) 0.05
C) 0.1
D) 0.116

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 formula to find the IRR for a single investment followed by a single return is: $1,000,000 * (1 + IRR)^3 = $1,158,000. Solving for IRR gives an approximate rate of 0.05 or 5%, making option B the closest choice.

Tony Corp Plans to Invest $1 Million in a Project