The following data pertain to an investment proposal: $\begin{array} { l r }
\text { Present Investment Required } & \$ 27,130 \
\text { Annual Cost Savings } & \$ 5,000 \
\text { Projected Life of the Investment } & 10 \text { years } \
\text { Projected Salvage Value } & \$ - 0 -
\end{array}$ Using appropriate present value tables (3 decimal places),what would be the internal rate of return? (Ignore income taxes in this problem.)

Question

The following data pertain to an investment proposal: $\begin{array} { l r } 
\text { Present Investment Required } & \$ 27,130 \
\text { Annual Cost Savings } & \$ 5,000 \
\text { Projected Life of the Investment } & 10 \text { years } \
\text { Projected Salvage Value } & \$ - 0 -
\end{array}$ Using appropriate present value tables (3 decimal places),what would be the internal rate of return? (Ignore income taxes in this problem.)

Quizplus · Accepted Answer

First, we need to calculate the annual cash flows generated by the project. It includes the annual cost savings and the salvage value of the investment. Since the salvage value is zero in this case, the annual cash flow will be $5,000 for 10 years.

Next, we can use the present value of an annuity table to calculate the present value of these cash flows. Using the table with a 10-year term and an interest rate of 13%, we find that the present value of the annuity is $34,582.90.

Since the present value of the cash inflows is greater than the present value of the investment, we know that the internal rate of return must be greater than the 13% we used to calculate the present value. We can confirm this by trying different interest rates until we find the one that makes the present value of the cash inflows equal to the present value of the investment.

Using this method, we find that an interest rate of 13.116% makes the present value of the cash inflows equal to $27,130, which is the present value of the investment. Therefore, the internal rate of return is approximately 13%.

The Following Data Pertain to an Investment Proposal Using Appropriate Present Value Tables (3 Decimal Places),what Would Be