Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's internal rate of return?
A) 27.28%
B) 21.26%
C) 20.53%
D) 15.98%

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, option C (20.53%) is the correct answer because it is the rate at which the present value of the investment's cash flows equals its initial cost, thus making the NPV equal to zero. Calculating the exact IRR requires either using financial calculator functions, spreadsheet software like Excel, or iterative numerical methods, as it involves solving a polynomial equation which cannot be done analytically in most cases.

Your Firm Is Considering an Investment That Will Cost $920,000