Question

A firm buys a new piece of equipment for $31,548, and will receive a cash flow of $4,000 per year for eleven years.

What is the IRR? (Use a financial calculator to arrive at the answers. Round the final answer to the nearest whole percent.)

IRR=

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

Initial investment = Annuity * [ 1 - 1 / ( 1 + r)ⁿ] / r

31,548 = 4,000 * [ 1 - 1 / ( 1 + R)¹¹] / R

Using trial and error method, let's try R as 6%

31,548 = 4,000 * [ 1 - 1 / ( 1 + 0.06)¹¹] / 0.06

31,548 = 31,548

Therefore IRR is 6%

Keys to use in a financial calculator:

CF0 -31,548

CF1 4,000, F01 11

IRR CPT