A firm is trying to determine if it should launch a product. The product has an expected life of three years. It will bring in cash flows of $10,000 in the first year, $9,000 in the second year, and $7,500 in the third year. The company estimates that it will invest $20,000 in product research and development costs. What is the estimated IRR for this product? Choose the IRR value that is closest to the amount invested.
A) 5%
B) 12%
C) 15%
D) 16%

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to find the discount rate that makes the present value of the cash inflows equal to the cost of the investment. 
Using a financial calculator or Excel, we can determine that the IRR for this investment is approximately 16%. Therefore, the closest option is D.

A Firm Is Trying to Determine If It Should Launch