A firm is considering a project requiring an investment of $27,000. The project would generate an annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation. The approximate internal rate of return for the project is

Question

Quizplus · Accepted Answer

To calculate the approximate internal rate of return (IRR) for the project, we need to set the net present value (NPV) of the project's cash flows equal to zero and solve for the discount rate that makes this equation true.

Using a financial calculator or Excel, we can find that the NPV of the project's cash flows is:

NPV = -$27,000 + $6,296/(1+r) + $6,296/(1+r)^2 + ... + $6,296/(1+r)^7

Where r is the discount rate we are trying to solve for.

Setting NPV equal to zero and solving for r, we find:

0 = -$27,000 + $6,296/(1+r) + $6,296/(1+r)^2 + ... + $6,296/(1+r)^7

Using trial and error or a financial calculator, we find that the discount rate that makes NPV equal to zero is approximately 14%. Therefore, the answer is D.

A Firm Is Considering a Project Requiring an Investment of $27,000