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%. Determine the internal rate of return for the project (to the nearest tenth of one percent).
A) 12.0%
B) 12.6%
C) 3.6%
D) 12.4%

Question

Quizplus · Accepted Answer

The correct answer is D because the IRR is the discount rate that makes the NPV of the project equal to zero. In this case, the NPV is calculated as follows:NPV = -100,000 + 28,000/(1+0.12)^1 + 28,000/(1+0.12)^2 + 28,000/(1+0.12)^3 + 28,000/(1+0.12)^4 + 28,000/(1+0.12)^5= -100,000 + 25,000 + 22,321.43 + 19,929.85 + 17,794.51 + 15,897.33= 12.4%

An Investment Project Requires a Net Investment of $100,000