Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.)
A) 11%
B) 13%
C) 15%
D) 17%

Question

Quizplus · Accepted Answer

To find the internal rate of return (IRR), we need to solve for the discount rate that makes the net present value (NPV) of the cash flows equal to the initial investment of $2,750,000.

NPV = -2,750,000 + 612,335/(1+r) + 891,005/(1+r)^2 + 1,132,000/(1+r)^3 + 1,412,500/(1+r)^4

Using trial and error or a financial calculator, we find that the discount rate that results in NPV = 0 is approximately 15.09%. Rounded to the nearest percent, the answer is choice C (15%).

Therefore, investing in this equipment would yield an IRR of approximately 15%, which is higher than the cost of capital, making it a profitable investment for Signet Pipeline Co.