An investment of $724 will produce estimated cash flows of $250 at the end of each of the next four years.Which of the following would be reported as the internal rate of return (IRR)?

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to find the discount rate that makes the present value of the cash flows equal to the initial investment:
PV = -724
PV = 250/(1+IRR)^1 + 250/(1+IRR)^2 + 250/(1+IRR)^3 + 250/(1+IRR)^4
Using trial and error or a financial calculator, we find that an IRR of approximately 14.3% will make both sides of the equation equal. Therefore, the best choice is D.

An Investment of $724 Will Produce Estimated Cash Flows of $250