Answer:
Annual cash flow = $1, 613
Internal rate of return = 12%
Step-by-step explanation:
The internal rate of return ( I.R.R) is the discount rate that makes the present value of cash inflows to be equal to the present value of cash inflow.
The investment to inflow ratio = Investment
Annual cash inflow
6.2 = 10,000
y
6.2 × y = 10,000
y = 10,000/6.2
= 1,613
Annual cash inflow = $1,613
The internal rate of return,for this question, is the discount rate that equates the present value (PV) of $1, 613 for 12 years to 10,000
Present Value of Annuity = Annual cash flow × Annuity factor
10,000 = 1 612.9 × 6.2.
Note that the annuity factor is given as 6.2
To determine the rate that produces an annuity factor of 6.2, we use the Present Value of Annuity table.
Using the table,
We locate 12 under column labeled " n " - i.e no of periods, we look up for the figure 6.2 in the row opposite 12. The closest figure found is 6. 1944. Finally, we look up ( look upward )to find the rate that produces this figure, and it is 12%.
Note : Using the table, the intersection of 12% and 12 years gives the annuity factor 6.2
Annual cash flow = $1, 613
Internal rate of return = 12%