Final answer:
The Internal Rate of Return (IRR) is a financial metric used to evaluate the potential profitability of an investment and is calculated by finding the discount rate that makes the present value of future cash flows equal to the initial investment.
Step-by-step explanation:
The student is asking about how to calculate the Internal Rate of Return (IRR) for a particular project. The IRR is a financial metric used to assess the profitability of potential investments. It is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.
To calculate the IRR, we will use a financial calculator or software that has the IRR calculation functionality because manually solving for it involves trial and error which is complex and time-consuming.
We have an initial cost of $146,500 and cash inflows for the subsequent three years. The cash inflows are $56,700 for the first year, $68,500 for the second year, and $71,200 for the third year. The IRR is the discount rate that makes the present value of these cash inflows equal to the initial investment. Thus, it satisfies the equation: 0 = -$146,500 + $56,700/(1 + IRR) + $68,500/(1 + IRR)2 + $71,200/(1 + IRR)3.
Using the given cash flows and initial investment, we would input these values into the IRR function of a financial calculator or Excel. The correct IRR answer, based on the given options, must be determined using this financial tool.