Question

What would be the internal rate return on an investment with an initial cost of $226,485, expected annual cash flows of $45,000 and expected annual income of $43,500 for the next 7 years? Group of answer choices

8%

12%

9%

10%

Answer 1

Answer)

Facts of the question:

Initial cash outflow = $ 226,485

Annual cash inflow = $ 45,000

calculation of Internal rate of return (IRR)

Internal rate of return is the rate at which the present value of cash inflows is equal to the present value of cash outflows. In the given question, IRR will be the rate at which the present value of annual cash inflows (i.e. $ 45,000) will be equal to initial cash outlflow (i.e. $ 226,485).

Present value annuity factor = $ 226,485/ $ 45,000

= 5,033 (approximately)

On perusal of Present value of annuity of $ 1 table, the value corresponding to 7 years at 9% is 5.033. Thus the Internal rate of retunr (IRR) of the investmetnt is 9%