Question

A project is estimated to cost $454,730 and provide annual net cash flows of $74,000 for 10 years.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Determine the internal rate of return for this project, using the Present Value of an Annuity of $1 at Compound Interest table shown above.
%

Answer 1

Internal rate of return is the rate at which the discounted outflow is equal to discounted inflow of project.

The rate can be found out as follows:

Year	Cash Flow	Present value Annuity Factor	Discounted Cash Flow
0 (Immediately)	(454730)	1	(454730)
1-10	74000	"x"	454730

Discounted inflows sholud be equal to $454730.

So 74000 (x) = 454730

x = 454730 / 74000

x = 6.145

So the present value annuity factor = 6.145

As per the annuity table the value of 6.145 corresponds to $1 compunded at 10% for 10 years.

So the Internal Rate of Return = 10%