Question

The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $32,445 and annual net cash flows of $9,000 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 1

Answer a)

Calculation of Present value factor for annuity of $ 1

Present value factor for annuity of $ 1 = Initial investment/ Annual cash inflows

                                                                    = $ 32,445/ $ 9,000

                                                                     = 3.605

Therefore present value factor for annuity of $ 1 for calculation of Internal Rate of Return is 3.605.

Answer b)

Calculation of Internal rate of return

On a perusal of present value of annuity of $ 1 table, the value (i.e. 3.605) calculated is found at 12% rate of return against 5 years. Thus the Internal rate of return is 12%.