Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Do not round intermediate computations. Round final answer to the nearest percent.)
A) 20%
B) 23%
C) 25%
D) 27%

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 a particular project equal to zero. To find the IRR, we typically use financial calculators or software because it involves solving for the rate in the NPV equation, which cannot be easily done by hand due to its complexity. Given the cash flows and the initial investment, the IRR for this project is approximately 23%, which is found by inputting these values into an IRR calculation tool or financial calculator.

Modern Federal Bank Is Setting Up a Brand-New Branch