Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for four years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is:

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the interest rate at which the sum of the present values of the expected cash inflows equals the initial cash outlay.

Using the present value factor for an annuity of $1 for 4 years at 12% (the middle interest rate provided), we can calculate the present value of the cash flows:

PV = $36,000 × 3.037 = $109,332

This means that at an interest rate of 12%, the present value of the cash inflows is exactly equal to the initial cash outlay, resulting in an IRR of 12%.

Therefore, the best choice is C.

Tennessee Corporation Is Analyzing a Capital Expenditure That Will Involve