Luong Machines Company is evaluating an investment of $1,100,000 which will yield net cash inflows of $197,062 per year for 7 years with no residual value.What is the internal rate of return? Present value of ordinary annuity of $1:
$$\begin{array} { | c | c | c | c | c | }
\hline & 5 \% & 6 \% & 7 \% & 8 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.100 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$
A) 5%
B) 6%
C) 7%
D) 8%

Question

Luong Machines Company is evaluating an investment of $1,100,000 which will yield net cash inflows of $197,062 per year for 7 years with no residual value.What is the internal rate of return? Present value of ordinary annuity of $1:
$$\begin{array} { | c | c | c | c | c | } 
\hline & 5 \% & 6 \% & 7 \% & 8 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.100 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$
A) 5%
B) 6%
C) 7%
D) 8%

Quizplus · Accepted Answer

To find the internal rate of return (IRR), we need to calculate the present value of the net cash inflows and compare it to the initial investment. The formula for the present value of an annuity is $PV = C \times [(1 - (1 + r)^{-n}) / r]$, where C is the annual cash inflow, r is the discount rate, and n is the number of periods. Here, we use the given table to find the rate that makes the present value of the cash inflows equal to the initial investment of $1,100,000. The cash inflow is $197,062 for 7 years. Looking at the table for 7 years, the closest value to the initial investment when multiplied by the annual cash inflow is under the 6% column ($5.582 \times $197,062 ≈ $1,100,000). Therefore, the IRR is approximately 6%.

Luong Machines Company Is Evaluating an Investment of $1,100,000 Which