Question

Rent-to-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate positive cash flows over the next four years in the amounts of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $80,000 in year four. Rent-to-Own's required rate of return is 10%. What is the internal rate of return of this project?

a. 10.07% b. 11.89% c. 12.26% d. 12.69%

Answer 1

IRR is the rate at which NPV = 0
IRR can be calculated using either a financial calculator or excel or through hit and trial:
Using Excel we get the IRR = 12.26% rounded to two decimal places
Below is the NPV schedule:

Year	CF	Discount Factor	Discounted CF
0	$ -4,50,000.00	1/(1+0.122613960119191)^0=	1	1*-450000=	$ -4,50,000.0000
1	$ 2,50,000.00	1/(1+0.122613960119191)^1=	0.890778162	0.890778161972818*250000=	$   2,22,694.5405
2	$ 1,25,000.00	1/(1+0.122613960119191)^2=	0.793485734	0.793485733847673*125000=	$       99,185.7167
3	$ 1,10,000.00	1/(1+0.122613960119191)^3=	0.706819764	0.706819763548483*110000=	$       77,750.1740
4	$      80,000.00	1/(1+0.122613960119191)^4=	0.62961961	0.62961960981978*80000=	$       50,369.5688
				NPV = Sum of all Discounted CF	$                 0.0000