Question

Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A) 22%
B) 20%
C) 24%
D) 28%

Answer 1

The internal rate of return (IRR) of the project is approximately 24%.

Step-by-step explanation:

To calculate the internal rate of return (IRR) of the project, we need to find the discount rate that makes the present value of the cash flows equal to the initial investment. In this case, the initial investment is $23 million and the cash flows over the next three years are $14 million, $11.75 million, and $6.35 million. To find the IRR, we can use the financial calculator or a spreadsheet software.

Using a spreadsheet software, we can enter the initial investment as a negative value (-$23 million) and the cash flows as positive values ($14 million, $11.75 million, and $6.35 million). Then, we can use the IRR function to calculate the internal rate of return. The IRR is the rate at which the net present value (NPV) of the cash flows is zero. In this case, the IRR is approximately 24%.