An investment of $3300 will produce estimated cash flows of $1000 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

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, the IRR is the rate at which the present value of the future cash flows ($1000 at the end of each of the next four years) equals the initial investment ($3300). Without performing the exact calculation (which involves solving a polynomial equation), the IRR for this investment is closest to 8.0% based on standard financial tables or using a financial calculator. This is because the IRR is a trial-and-error estimation that identifies the rate where the present value of outflows equals the present value of inflows, and among the given options, 8.0% is the rate that would most closely achieve this balance for the given cash flows and initial investment.

An Investment of $3300 Will Produce Estimated Cash Flows of $1000