Question

Joe Flicek of SIP Commendations is considering investing $79,137 in a
computer storage room. He will rent space to customers and expects to generate
$22,500 annually net after miscellaneous expenses other than depreciation. (a)
Assuming Joe wishes to evaluate the project with a five-year time horizon, what is
the internal rate of return on the investment, ignoring any taxes to be paid? (b)
Should Joe make the investment if his required rate of return is 12 percent?

Please show all of the steps!

Answer 1

a)	IRR=Rate at which present value of cash inflows=Initial cash outflow
	Initial cash outflow/present value of cash inflows=79137/22500=3.5172
	Now look into the cumulative present value table for the row where period=5
	Search for 3.5172 in that row
	Hence, IRR=13%
b)	Select a project which has IRR > Required rate of return
	Required rate of return=12%
	IRR=13%
	Hence, Joe should make the investment