Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$ A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $231930 and is expected to generate cash inflows of $90000 each year for three years. The approximate internal rate of return on this project is
A) 8%.
B) 9%.
C) 10%.
D) The IRR on this project cannot be approximated.

Question

Use the following table $\text { Present Value of an Annuity of } 1$$\begin{array}{rrrr}
\text { Period } & 8 \% & 9 \% & 10 \%\
1 & .926 & .917 & .909 \
2 & 1.783 & 1.759 & 1.736 \
3 & 2.577 & 2.531 & 2.487
\end{array}$  A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $231930 and is expected to generate cash inflows of $90000 each year for three years. The approximate internal rate of return on this project is
A) 8%.
B) 9%.
C) 10%.
D) The IRR on this project cannot be approximated.

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. To find the IRR, we look for the rate at which the present value of the annuity (the annual cash inflows) equals the initial investment. Using the given table, at 8%, the present value of an annuity of $1 for 3 periods is 2.577. Multiplying this by the annual cash inflow of $90,000 gives $231,930 (approximately), which matches the project cost. This indicates that the IRR is approximately 8%.

Use the Following Table Present Value of an Annuity of 1\text { Present Value of an Annuity of } 1 Present Value of an Annuity of 1

Use the Following Table $\text { Present Value of an Annuity of } 1$