Question

Below is a table for the present value of $1 at compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	0.890	0.826	0.797
3	0.840	0.751	0.712
4	0.792	0.683	0.636
5	0.747	0.621	0.567

Below is a table for the present value of an annuity of $1 at compound interest.

Year	6%	10%	12%
1	0.943	0.909	0.893
2	1.833	1.736	1.690
3	2.673	2.487	2.402
4	3.465	3.170	3.037
5	4.212	3.791	3.605

Using the tables above, what would be the internal rate of return of an investment that required an investment of $227,460 and would generate an annual cash inflow of $60,000 for the next 5 years?

a.12%

b.6%

c.10%

d.cannot be determined from the data given

Answer 1

• Internal rate of Return is that rate of interest which given a $ 0 Net Present value if future cash flows are discounted at the rate.
• Hence, Net Present Value = (Same Future Annual Cash Flow x Annuity Value of IRR % for 5 years) - $ 227,460

$ 0 = ($ 60,000 x Annuity Value) - $ 227460

$ 0 + $ 227460 = $ 60000 x Annuity Value

227460/60000 = Annuity Value

Annuity Value = 3.791

• Now you look for the value 3.791 in the annuity table for 5^th year.
• Check under which Interest rate the annuity value 3.791 falls under.
• YES, it falls under 10% Interest rate.
• Hence, the IRR = 10%
• Correct Answer = Option ‘C’ 10%