Question

Ryder Industries is considering a project that will produce cash inflows of $92,000 a year for five years. What is the internal rate of return if the initial cost of the project is $275,000?

Select one:

a. 19.67 percent

b. 25.23 percent

c. 17.26 percent

d. 21.28 percent

e. 23.45 percent

Answer 1

20.02%

Explanation:

Formula :
`NVP = 0 =-P_0 + (P_1)/((1+IRR)) + (P_2)/((1+IRR)^2) + . . . +(P_n)/((1+IRR)^n)`

`P_0 = 275000`

n = 1,2,3,4,5

Substitute the values in the formula :

`0 =-275000 + (92000)/((1+IRR)) + (92000)/((1+IRR)^2) + (92000)/((1+IRR)^3)+(92000)/((1+IRR)^4)+(92000)/((1+IRR)^5)`

`275000 = (92000)/((1+IRR)) + (92000)/((1+IRR)^2) + (92000)/((1+IRR)^3)+(92000)/((1+IRR)^4)+(92000)/((1+IRR)^5)`

Solving for IRR using calculator

IRR = 20.02

Hence the internal rate of return if the initial cost of the project is $275,000 is 20.02%