Question

A company is considering investing in a project that costs $70,000, has an expected useful life of 3 years, a salvage value of 0, and will increase net annual cash flows by $28,650. The approximate internal rate of return on this project is Group of answer choices

9%

8%

10%

11%

Answer 1

The approximate internal rate of return (IRR) on this project is by Trial and Error Method is as follows:

Internal rate of return(IRR) (Trial and Error Method ) = LR + LR(NPV)/(LR (NPV) - HR(NPV)) * (HR - LR)

LR = Lower Rate

HR = Higher Rate

LR(NPV) = Net Present Value(NPV) from Lower Rate

HR(NPV) = Net Present Value(NPV) from Higher Rate

Lets LR = 10%

HR = 12%

LR(NPV) = $28,650 * (10% 3 Years) - $70,000

= $28,650 *2.48685 - $70,000

= $71,248 - $70,000

= $1,248

HR(NPV) =  $28,650 * (12% 3 Years) - $70,000

  = $28,650 * (2.40183) - $70,000

= $68,812 - $70,000

= - $1,188

internal rate of return(IRR) (Trial and Error Method ) = 10% +  $1,248 / ( $1,248 - ( - $1,188)*(12% - 10%)

= 10% + $1,248 /$2,436 *2%

= 10% + 1%

= 11%

So correct answer is option (4) or 11%