Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year four. What is the internal rate of return if the initial cost of the project is $749,000?
A) 3.43 percent
B) 4.29 percent
C) 5.81 percent
D) 6.32 percent
E) 7.55 percent

Question

Quizplus · Accepted Answer

The internal rate of return is the discount rate that makes the net present value of a project equal to zero. In this case, the net present value is:$$-749,000 + 238,000/(1+r) + 238,000/(1+r)^2 + 238,000/(1+r)^3 + 149,000/(1+r)^4 = 0$$Solving for r using a financial calculator gives:$$r = 6.32%$$

Diamond Enterprises Is Considering a Project That Will Produce Cash