could you please answer this question and put the steps :) Thankk you !!! Intern
ID: 2397457 • Letter: C
Question
could you please answer this question and put the steps :) Thankk you !!!
Internal Rate of Return Method The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $33,536 and annual net cash flows of $8,000 for each of the 10 years of its useful life Present Value of an Annuity of $1 at Compound Interest 5% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 12% 0.893 1.690 2.402 3.037 3.605 15% 0.870 1.626 2.283 2.855 3.352 3.784 4.160 4.487 ? .772 5.019 2090 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 Year 3 5 4.564 4.968 5.328 5.650 8 10Explanation / Answer
a.
NPV of a project is zero at a discount rate that is equal to internal rate of return.
So,
PV of Cash flow – Initial investment = 0
$ 8,000 x PVIFA (i, n) - $ 33,536 = 0
$ 8,000 x PVIFA (i, 10) = $ 33,536
PVIFA (i, 10) = $ 33,536/$ 8,000
PVIFA (i, 10) = 4.192
The present value factor to determine IRR is 4.192.
b.
Look at the present value of annuity table provided. Check row year 10. We can get the value 4.192 under interest rate of 20 %.
Hence internal rate of return of for the project is 20 %.
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