Question

A project is estimated to cost $413,780 and provide annual net cash flows of $85,000 for seven years.

Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Determine the internal rate of return for this project, using the Present Value of an Annuity of $1 at Compound Interest table shown above.

Answer 1

Internal rate of return is that rate where the present value of cash inflows is equal to present value of cash outflow.

$413,780 is the present value of cash outflow.

For $85,000 to be equal to $413,780 we should multiply with:

= $413,780 / $85,000

= 4.868

4.868 is the present value of annuity with which cash inflows should be multiplied to be equal to cash outflow.

From the table given in question, at 10% for 7 years, the present value of annuity is 4.868.

Therefore IRR = 10%