Which of the following is the approximate internal rate of return for an investment that costs $33,550 and provides a $5,000 annuity for 10 years? (PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)

Question

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the discount rate that equates the present value of the cash inflows to the initial investment.

Using the Present Value of an Annuity (PVA) formula with a $5,000 annuity for 10 years and a discount rate of x:

PVA = $5,000 * ((1 - (1 / (1 + x)^10)) / x) = $36,909.96

Next, we can use the Present Value (PV) formula to find the PV of the initial investment of $33,550:

PV = $33,550 / (1 + x)^10 = $14,122.94

Now, we can set up the equation to solve for x:

$36,909.96 - $14,122.94 = $22,787.02

$22,787.02 / $33,550 = 0.680 (rounded to 3 decimal places)

Using the Present Value of $1 table at n=10, we can find that the factor for a 68% discount rate is 0.3202.

1 - factor = 1 - 0.3202 = 0.6798, which is closest to the previous result of 0.680.

Therefore, the approximate internal rate of return for the investment is 8%, which corresponds to the discount rate that makes the present value of the cash inflows equal to the initial investment.

Which of the Following Is the Approximate Internal Rate of Return