Question

An investment costs $3,500 today. This investment is expected to produce annual cash flows of $1,200, $1,400, $1,300, and $1,100, respectively, over the next four years. What is the internal rate of return on this investment?

1) 14.6%
2) 12.4%
3) 8.1%
4) 16.2%

Answer 1

The internal rate of return (IRR) on this investment is approximately 14.6%. The correct option is A.

Step-by-step explanation:

To calculate the internal rate of return (IRR) on an investment, we need to find the discount rate that makes the present value of the cash flows equal to the initial investment. We can use the formula:

NPV = CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 + CF4/(1+r)4 - C

Where NPV is the net present value, CF is the cash flow, r is the discount rate, and C is the initial investment.

Plugging in the values from the question, we get:

3500 = 1200/(1+r) + 1400/(1+r)2 + 1300/(1+r)3 + 1100/(1+r)4

Solving this equation, we find that the internal rate of return on this investment is approximately 14.6%.