Suppose the interest rate is 8%.If a project requires an initial investment of $5,000 and returns $5,500 in a year,what is its internal rate of return?
A) 2%
B) 8%
C) 10%
D) 18%

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) of the project is the interest rate at which the net present value (NPV) of the project's cash flows is zero.

Using the formula for NPV, we can calculate the NPV of the project at different interest rates and find the IRR where the NPV is zero.

At an interest rate of 8%, the NPV of the project can be calculated as follows:

NPV = -5000 + 5500/(1+8%)^1
NPV = -5000 + 5069.44
NPV = 69.44

This means that at an interest rate of 8%, the project has a positive NPV, but it is not zero.

We can repeat this calculation for different interest rates until we find the IRR where the NPV is zero. By doing so, we can find that the IRR is approximately 10%:

NPV = -5000 + 5500/(1+10%)^1
NPV = -5000 + 5000
NPV = 0

Therefore, the best choice is C) 10%.

Suppose the Interest Rate Is 8