Albury Company is adding a new assembly line at a cost of $8.5 million. The company expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. Internal rate of return: What is the internal rate of return that Albury can earn on this project? (Round to the nearest percent.)

Question

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to use the formula:
NPV = 0 = -8.5 + 2/(1+r) + 3/(1+r)^2 + 4/(1+r)^3 + 5/(1+r)^4
Using trial and error or a financial calculator, we find that the internal rate of return for this project is approximately 20%. This means that the project is expected to generate a return equal to the company's cost of capital, so it is a good investment for Albury to take on. Option C is the correct answer.

Albury Company Is Adding a New Assembly Line at a Cost