Finch Corporation purchased an asset costing $12,000. Annual operating cash inflows generated from the asset are expected to be $2,168 each year for eight years. No salvage value is expected at the end of the asset's life. Using time value of money tables, which of the following rates is closest to the internal rate of return on the project?

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is found by equating the present value of cash inflows to the initial investment. Using the formula for the present value of an annuity: PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual cash inflow, r is the rate, and n is the number of periods. Since the exact rate is not easily calculable without a financial calculator or software, we use the given options and the fact that the total cash inflow is $2,168 × 8 = $17,344. The initial investment is $12,000. The IRR is the rate that makes the present value of the cash inflows equal to the initial investment. Given the options, 9% is the closest rate that would yield a present value of approximately $12,000 for the cash inflows, considering the time value of money tables and the nature of the IRR calculation.

Finch Corporation Purchased an Asset Costing $12,000