Question

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

Investment required in equipment	$	30,500
Annual cash inflows	$	6,200
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

21%

19%

17%

23%

Answer 1

The internal rate of return of the investment is closest to 19%

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

                                                = $30,500 / $6,200

                                                = 4.91935

From the Present Value Annuity Factor Table (PVIF Table), We can find that the discount rate (IRR) corresponding to the factor of 4.91935 for 15 Years is closest to 19%

Internal rate of return (IRR) of the investment = 19%