Question

A project is estimated to cost $463,565 and provide annual net cash flows of $115,000 for nine years.

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	3.353	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 The sum of the present values of a series of equal “Net cash flows” to be received at fixed time intervals.Present Value of an Annuity of $1 at Compound Interest table shown above.
%

Answer 1

Internal rate of return for this project 20%

Working:

Internal rate of return is the rate at which net present value is zero.
Net Present Value at 10%							Present Value of annuity of 1
					Annual cash flow
	Present Value of annual cash inflows				$       1,15,000	x	5.759	=	$       6,62,285
	Less cost of project								$       4,63,565
	Net Present Value								$       1,98,720
Net Present Value at 20%							Present Value of annuity of 1
					Annual cash flow
	Present Value of annual cash inflows				$       1,15,000	x	4.031	=	$       4,63,565
	Less cost of project								$       4,63,565
	Net Present Value								0
At 20%, Net Present value is zero.It means Internal rate of return is 20%