Internal Rate of Return Method
The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $75,820 and annual net cash flows of $20,000 for each of the five years of its useful life.
Present Value of an Annuity of $1 at Compound Interest | |||||
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 | 3.352 | 2.991 |
6 | 4.917 | 4.355 | 4.111 | 3.784 | 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 |
a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places.
b. Using the factor determined in part (a) and
the present value of an annuity of $1 table above, determine the
internal rate of return for the proposal.
%
Answer
Present Value factor for an annuity =
$ 75820 / $ 20000 annual cash flows
= 3.791
Answer = 10%
Internal Rate of Return Method The internal rate of return method is used by Testerman Construction...
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