A firm is considering a project requiring an investment of $27,000. The project would generate an annual cash flow of $6,296 for the next seven years. The company uses the straight-line method of depreciation with no mid-year convention. Ignore income taxes. The approximate internal rate of return for the project is

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the present value of the cash inflows equal to the initial investment. We can use the formula for the present value of an annuity to calculate the present value of the cash inflows:

PV = CF x [1 - (1 + r)-n] / r

Where:
PV = present value
CF = cash flow
r = discount rate
n = number of periods

Using this formula, we can calculate the present value of the cash inflows for the project as follows:

PV = $6,296 x [1 - (1 + r)-7] / r
PV = $6,296 x [1 - (1 + r)-7] / r

To find the IRR, we need to find the discount rate that makes the present value of the cash inflows equal to the initial investment of $27,000. We can use a financial calculator or trial and error to find the discount rate that satisfies this condition. Doing so, we find that the approximate IRR for the project is 14%. Therefore, the best choice is D.

A Firm Is Considering a Project Requiring an Investment of $27,000