Question

The Picasso Co. is evaluating a project estimated to cost $190,200 and provide annual cash inflows of $60,000 for the next 4 years. The company’s cost of capital is 9%. What is the internal rate of return on the project?

Group of answer choices

8%

9%

10%

11%

Answer 1

Solution :

Answer : The Answer is (c) 10%.

Working :

IRR is the rate at which PV of Annual Cash Flow = Project Cost

$ 190,200 = Cumulative PVF (IRR, 4 Years) * Annual Cash Inflow

$ 190,200 = Cumulative PVF (IRR, 4 Years) * $ 60,000

Cumulative PVF (IRR, 4 Years) = $ 190,200 / $ 60,000

Cumulative PVF (IRR, 4 Years) = 3.17

Referring the PV factor table, 3.17 is the Cumulative PV factor of 10% for 4 Years.

So the IRR = 10%.

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