A project is estimated to cost $463,565 and provide annual net cash flows of $11

Question

A project is estimated to cost $463,565 and provide annual net cash flows of $115,000 for nine years.

Determine the internal rate of return for this project, using the The sum of the present values of a series of equal “Net cash flows” to be received at fixed time intervals.Present Value of an Annuity of $1 at Compound Interest table shown above.
%

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 3.353 2.991 6 4.917 4.355 4.111 3.785 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

Explanation / Answer

Internal rate of return for this project 20%

Working:

Internal rate of return is the rate at which net present value is zero. Net Present Value at 10% Present Value of annuity of 1 Annual cash flow Present Value of annual cash inflows $       1,15,000 x 5.759 = $       6,62,285 Less cost of project $       4,63,565 Net Present Value $       1,98,720 Net Present Value at 20% Present Value of annuity of 1 Annual cash flow Present Value of annual cash inflows $       1,15,000 x 4.031 = $       4,63,565 Less cost of project $       4,63,565 Net Present Value 0 At 20%, Net Present value is zero.It means Internal rate of return is 20%

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