Question

Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.):

Investment required in equipment	$	35,500
Annual cash inflows	$	8,200
Salvage value of equipment	$	0
Life of the investment		15	years
Required rate of return		10	%

The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

The internal rate of return of the investment is closest to:

Multiple Choice:

A) 20%

B) 24%

C) 26%

D) 22%

Answer 1

Calculation of IRR
Period	Initial Cost (A)	Cash Inflows{B}	Net Cash Inflows (A-B)	P.V.A.F @ 10%	P.V @ 10%	P.V.A.F @ 25%	P.V @ 25%
0	-35,500	0	-35,500	1.00000	-35,500	1.00000	-35,500
1-15		8200	8,200	7.60608	62,370	3.26821	26,799
				NPV	26,870		-8,701
IRR= Lower Discount Rate + [ Lower Rate NPV / ( Lower Rate NPV - Higher Rate NPV )]*(Higher Discount Rate-Lower Discount Rate)
So By putting figure into this formula IRR is			21.92%
Option D is correct.