Question

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 $48,015 and annual net cash flows of $9,000 for each of the eight years of its useful life. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.909 0.893 0.870 0.833 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.353 2.991 4.355 4.111 3.785 3.326 4.917 5.582 6.210 6.802 107.360 4.868 5.335 5.759 6.145 4.564 4.160 3.605 4.968 4.487 3.837 4.772 4.031 5.6505.0194.192 5.328 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 1

a. 5.335 ($48,015 / $9,000)

b. 10%

Using the factor determined in part (a) and the present value of an annuity of $1 table above,