A project is estimated to cost $454,730 and provide annual net cash flows of $74

Question

A project is estimated to cost $454,730 and provide annual net cash flows of $74,000 for 10 years.

Determine the internal rate of return for this project, using the 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 3.352 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

Internal rate of return is the rate at which the discounted outflow is equal to discounted inflow of project.

The rate can be found out as follows:

Discounted inflows sholud be equal to $454730.

So 74000 (x) = 454730

x = 454730 / 74000

x = 6.145

So the present value annuity factor = 6.145

As per the annuity table the value of 6.145 corresponds to $1 compunded at 10% for 10 years.

So the Internal Rate of Return = 10%

Year Cash Flow Present value Annuity Factor Discounted Cash Flow 0 (Immediately) (454730) 1 (454730) 1-10 74000 "x" 454730

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