Question

Thomas, Inc. is considering a five-year project that has an initial outlay or cost of $120,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $55,000, $45,000, $35,000, $25,000, and $15,000. Thomas uses the internal rate of return method to evaluate projects. What is the project's IRR?

a)The IRR is less than 22.50%.
b)The IRR is about 19.16%.
c)The IRR is about 17.86%.
d)The IRR is over 25.50%.

Answer 1

To calculate the project's Internal Rate of Return (IRR), we can use trial and error or Excel's IRR function. The correct answer is option b) The IRR is about 19.16%.

Step-by-step explanation:

To calculate the Internal Rate of Return (IRR) for the project, we need to find the discount rate at which the present value of the cash inflows equals the initial cost. We can use trial and error or Excel's IRR function to find the answer.

1. Using trial and error, we can start with an assumed rate and calculate the present value of cash inflows by discounting each cash flow using the formula: PV = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n. We continue adjusting the assumed rate until the present value is equal to the initial cost.
2. Using Excel's IRR function, we can enter the cash inflows as negative values and the initial cost as a positive value. The IRR function will then calculate the discount rate that results in a present value of zero.

After performing the calculations, the project's IRR is about 19.16%. Therefore, the correct answer is b) The IRR is about 19.16%.