Cardinal Inc. purchased an asset costing $25,000. Annual operating cash inflows generated from the asset are expected to be $6,595 each year for five 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 initial investment to the present value of future cash inflows. Given the annual cash inflow of $6,595 for 5 years and an initial investment of $25,000, we look for a rate where the present value of these cash inflows equals the initial investment. Using a present value of an annuity table, the factor that multiplies $6,595 to equal approximately $25,000 falls closest to the 10% interest rate factor over 5 years.