Internal rate of return: Arc Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Round to the nearest percent.)

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from the investment equal to zero. In this case, we can calculate the NPV of the three cash flows as follows:

NPV = -23,000,000 + 14,000,000/(1+0.20) + 11,750,000/(1+0.20)^2 + 6,350,000/(1+0.20)^3

NPV = -23,000,000 + 11,666,667 + 8,263,425 + 3,190,881

NPV = 17,520

To find the IRR, we need to find the discount rate that makes the NPV equal to zero. We can use a trial and error method or a financial calculator to find the IRR. The IRR in this case is approximately 22%, which is the closest answer choice. Therefore, the best choice is A) 22%.

Internal Rate of Return: Arc Real Estate Company Is Planning