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Internal Rate of Return Method
The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $73,600 and annual net cash flows of $10,000 for each of the 10 years of its useful life.
Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3522.99164.9174.3554.1113.7843.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192
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.
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Answer a. Present Value Factor for an Annutiy of $1
At IRR,
PV of Inflows = PV of Outflows
Cash inflows pa*PVAF(x,10) = 73600
10000*PVAF = 73600
PVAF(x,10) = 73600/10000
PVAF(x,10) = 7.360
Therefore, present value factor for an annuity of $1 which can be used in determining the internal rate of return is 7.360
Answer b. Internal Rate of Return
Using the table given above,
Interest Rate at which the annuity for 10 years is 7.360 shall be 6%
Years 6% 10% 12% 15% 20%
1                                       0.9434 0.9091                0.8929      0.8696      0.8333
2                                       0.8900 0.8264                0.7972      0.7561      0.6944
3                                       0.8396 0.7513                0.7118      0.6575      0.5787
4                                       0.7921 0.6830                0.6355      0.5718      0.4823
5                                       0.7473 0.6209                0.5674      0.4972      0.4019
6                                       0.7050 0.5645                0.5066      0.4323      0.3349
7                                       0.6651 0.5132                0.4523      0.3759      0.2791
8                                       0.6274 0.4665                0.4039      0.3269      0.2326
9                                       0.5919 0.4241                0.3606      0.2843      0.1938
10                                       0.5584 0.3855                0.3220      0.2472      0.1615
                                      7.3601 6.1446                5.6502      5.0188      4.1925

ekkarill92 answered 2 years ago
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