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10 September, 07:51

Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is

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  1. 10 September, 09:15
    0
    12%

    Explanation:

    The internal rate of return is that return in which the net present value is zero which means the initial investment is equal to the present value of the yearly cash flows after considering the discounting factor

    In mathematically,

    Initial investment = Present value of the yearly cash flows after considering the discounting factor

    which equals to

    $109,332 = $36,000 * PVIFA for four years

    So, PVIFA for four years would be

    = $109,332 : $36,000

    = 3.037

    And, the 3.037 for four years is the rate of interest 12%
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