An investment carrying a current cost of $120,000 is going to generate $50,000 of revenue for each of the next three years. To calculate the internal rate of return we need to:
A) calculate the present value of each of the $50,000 payments and multiply these and set this equal to $120,000.
B) find the interest rate at which the present value of $150,000 for three years from now equals $120,000.
C) find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000.
D) subtract $120,000 from $150,000 and set this difference equal to the interest rate.

Question

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the interest rate at which the sum of the present values of $50,000 for each of the next three years equals $120,000. This involves calculating the present value of each payment and finding the interest rate that makes the sum of these present values equal to the initial cost of the investment. Thus, the correct answer is C.

An Investment Carrying a Current Cost of $120,000 Is Going