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A company is considering investing in a project that costs $70,000, has an expected useful life...

A company is considering investing in a project that costs $70,000, has an expected useful life of 4 years, a salvage value of 0, and will increase net annual cash flows by $21,600. The approximate internal rate of return on this project is

Group of answer choices 11% 10% 9% 8%

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Answer #1

IRR is calculated by the condition that the discount rate is set such that the NPV = 0 for a project.

IRR can be calculated by using an repetetive process where the one tries different discount rates until the NPV equals to zero

When 9 % is tried an amount approximately equal to $70,000 is found

Therefore answer is 9%

present value = future value / (1 + r)n   where r is rate and n is number of years

First year - (21600)/(1 + .09) = 19,816.51

Second year - 21600/(1 + .09)2  = 18,180.29

Third year - 21600/(1 + .09)3 = 16,679.16

Forth year - 21600/(1 + .09)4  = 15,301.99

Total = 69,977.95

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