Below are two potential investment alternatives:

-Assume straight-line amortization in all computations, and ignore income taxes. The internal rate of return in case X is approximately
A) 8 percent.
B) 10 percent.
C) 12 percent.
D) 14 percent.

Question

Below are two potential investment alternatives:
  
-Assume straight-line amortization in all computations, and ignore income taxes. The internal rate of return in case X is approximately
A) 8 percent. 
B) 10 percent. 
C) 12 percent. 
D) 14 percent.

Quizplus · Accepted Answer

To calculate the internal rate of return, we need to find the discount rate that makes the net present value of cash flows equal to zero. Using a financial calculator or spreadsheet, we can find that the internal rate of return for alternative X is approximately 12 percent.

For alternative Y, we can see that the initial cash outflow is lower than alternative X, but the cash inflows are also lower, resulting in a longer payback period. Therefore, alternative X is the better choice with a higher internal rate of return.

Below Are Two Potential Investment Alternatives