The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years, and produces after-tax cash flows equal to $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's internal rate of return (IRR)?

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that makes the net present value (NPV) of the project equal to zero.

We can use the formula:

NPV = -Initial Investment + (Cash Flows / (1 + r)^t)

Where NPV = 0
Initial Investment = $200,000
Cash Flows = $44,503
r = IRR
t = 10 years

0 = -$200,000 + ($44,503 / (1 + r)^1) + ($44,503 / (1 + r)^2) + ... + ($44,503 / (1 + r)^10)

Using a financial calculator or spreadsheet, we can find that the IRR is approximately 18%. Therefore, the best choice is C) 18%.

The Capital Budgeting Director of Sparrow Corporation Is Evaluating a Project