Question

Internal Rate of Return Method

The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $80,620 and annual net cash flows of $20,000 for each of the nine years of its useful life.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places.

b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal.
%

Answer 1

(a)-The present value factor for an annuity of $1 used for determining the internal rate of return

The present value factor for an annuity of $1 used for determining the internal rate of return = Initial Investment Cost / Annual cash inflow

= $80,620 / $20,000 per year

= 4.031

(b)-The Internal rate of return for the proposal.

From the Present Value Annuity Factor Table (PVAIF Table), the discount rate (IRR) corresponding to the factor of 4.031 for 9 Years is equal to 20%

Therefore, the Internal rate of return for the proposal = 20%