The internal rate of return method is used by King Bros. Construction Co. in ana

Question

The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $53,548 and annual net cash flows of $11,000 for each of the seven years of its useful life. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places. b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal. %

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

53548=11000/1.0x+11000/1.0x^2+.............+11000/1.0x^7

53548=11000[1/1.0x+1/1.0x^2+............+1/1.0x^7]

[1/1.0x+1/1.0x^2+............+1/1.0x^7]=(53548/11000)

[1/1.0x+1/1.0x^2+............+1/1.0x^7]=4.868

a.Hence present vale factor to be used=4.868

b.Hence looking at present value factor (10%,7 years);irr=10%

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