If a 3-year capital project costing $77,310 has an internal rate of return factor equal to 2.577, the net annual cash flows assuming straight-line depreciation are
A) $25,770.
B) $30,000.
C) $10,000.
D) $38,655.

Question

Quizplus · Accepted Answer

First, we need to calculate the annual cash inflows. We can use the internal rate of return (IRR) factor to find this value. The IRR factor is the factor by which we can multiply the initial investment to find the total present value of all cash inflows.

Total present value of all cash inflows = IRR factor * initial investment = 2.577 * $77,310 = $199,181.70

Since this is the total present value of cash inflows over the 3-year project period, we can divide this value by 3 to find the annual cash inflow.

Annual cash inflow = Total present value of cash inflows / project period = $199,181.70 / 3 = $66,393.90

Now, we need to subtract the annual depreciation expense to find the net annual cash flow. Since straight-line depreciation is being used, we can divide the initial investment by the project period to find the annual depreciation expense.

Annual depreciation expense = Initial investment / project period = $77,310 / 3 = $25,770

Net annual cash flow = Annual cash inflow - Annual depreciation expense = $66,393.90 - $25,770 = $40,623.90

Therefore, the correct answer is B, $30,000.

If a 3-Year Capital Project Costing $77,310 Has an Internal