Question

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

Investment required in equipment	$	30,000
Annual cash inflows	$	6,000
Salvage value of equipment	$	0
Life of the investment		15	years
Required rate of return		10	%

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

The internal rate of return of the investment is closest to:

16%

18%

20%

22%

Answer 1

Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.

Year	cash flow
0	-30000
1	6000
2	6000
3	6000
4	6000
5	6000
6	6000
7	6000
8	6000
9	6000
10	6000
11	6000
12	6000
13	6000
14	6000
15	6000
IRR	18.42%
Formula	=IRR(B15:B30)

Correct answer is B