Question

Compute the approximate internal rate of return for each project. Round your rates to 6 decimal points.

Use info below

Net present value = Present value of cash inflows - Present value of cash outflows

Project A: Present value of cash inflows = Annual cash inflows x PVIFA8%,4 =

$126000 x 3.312127 = $417328.00

Present value of cash outflows = Initial investment = $400000

Net present value = $417328 - $400000 = $17328

Project B: Present value of cash inflows = Annual cash inflows x PVIFA8%,4

= $52800 x 3.312127 = $174880.31

Present value of cash outflows = Initial investment = $160000

Net present value = $174880.31 - $160000 = $14880.31

Answer 1

Internal rate of return is the rate at which the net present value of project will be Zero.

That is the present value of cash inflows should be equal to cash outflow.

The formula to find present value of inflows =

In the formula: r = rate of interest

n = number of years

Annuity amount = Equal amount of cash inflow.

Using the above, the internal rate of return can be calculated as follows:

Project A:

When Present value of annuity is equated to initial cash outflow the IRR is computed as 9.931039%.

Project B:

When Present value of annuity is equated to initial cash outflow the IRR is computed as 12.110361%.

Conclusion:

Project A IRR = 9.931039%

Project B IRR = 12.110361%.