An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent).

Question

Jessie Williams

Business

15 November, 16:21

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent).

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Caylee Gates · Answer 1

The internal rate of return for the project is 12.4%.

Explanation:

The internal rate of return (IRR) of a project is the discount rate that brings the net present value of all project cash flows to 0 (zero).

We have the project cash flows summarized as followed:

Y0 = Net initial investment of - $100,000;

Y1 - Y5: equal annual net cash inflows of $28,000 each year.

Thus, we have the formula for finding IRR as followed:

-100,000 + (28,000/IRR) / [ 1 - (1+IRR) ^ (-5) ] = 0;

Solve the equation, we have IRR = 12.4%.