Question

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm’s cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent).

Answer 1

The internal rate of return for the project is 12.4%.

Step-by-step explanation:

The internal rate of return (IRR) of a project is the discount rate that brings the net present value of all project cash flows to 0 (zero).

We have the project cash flows summarized as followed:

Y0 = Net initial investment of -$100,000;

Y1 - Y5: equal annual net cash inflows of $28,000 each year.

Thus, we have the formula for finding IRR as followed:

-100,000 + (28,000/IRR) / [ 1 - (1+IRR)^(-5) ] = 0;

Solve the equation, we have IRR = 12.4%.