Question

For a project, an initial cash outlay of $1.4 million is made. In year 1 the expected annual cash flow is $900,000, years 2-5 the expected annual cash flow is $1,000,000 and in year 6 the expected annual cash flow is $1.3 million. A cost of capital of 15% is used. The IRR (internal rate of return) is ________. A. 25.5% B. 12.5% C. 13.5% D. 65.8% E. 40.0%

Answer 1

D. 65.8%

Step-by-step explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator:

Cash flow in year zero = $-1.4 million

Cash flow in year one = $900,000

Cash flow each year from year two to five =$1,000,000

Cash flow in year 6 = $1.3 million.

IRR = 65.8%

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you