Internal Rate of Return Method The internal rate of return method is used by Car

Question

Internal Rate of Return Method

The internal rate of return method is used by Carlisle 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.

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.
%

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

Explanation / Answer

Presnt Value of the Proposal = -53,548 + 11,000 * Present Value Factor for 7 years

Answer Part a.

IRR is the rate at which present value of the proposal is 0.

So, 0 = -53,548 + 11,000 * Present Value Factor for 7 years

Present Value Factor for 7 years = 4.868

Answer Part b.

Present Value Factor for 7 years is 4.868 so looking at the table in the 7th row we find that the IRR is 10%.

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