Green Ltd has invested in a project with a cost of $36,504, annual net cash flows of $12,000, a terminal value of $4,000, and a 5-year useful life. The firm uses a 16% discount rate. Compute the internal rate of return to the nearest tenth of a percent. Ignore income taxes.

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that makes the present value of the net cash flows and terminal value of the project equal to its initial cost. We can use the following formula to calculate IRR:

Initial cost = PV of net cash flows + PV of terminal value
$36,504 = $12,000 x [1 - 1/(1+r)^5] / r + $4,000 / (1+r)^5

Using trial and error or a financial calculator, we find that the discount rate that satisfies this equation is approximately 20.8%. Therefore, the answer is B.

Green Ltd Has Invested in a Project with a Cost