Question

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is
a. 12%
b. 6%
c. 8%
d. 10%

Answer 1

Answer:

The answer is c.8%.

Explanation:

The internal rate of return is the rate of an investment where the cash outlay and the actual value of the cash flows are the same, so the return is eqaul to zero. The actual value of the cash flow are calculated: annual cash flow multiplied by an annuity of $1 at a selected interest. So, the result has to be equal to the outlay (208,240). In this case, x is the annuity.

• $208,240 = 40,000 * x$
• $208,240/40,000 = x = 5.206$

The annuity of 5.206 is obtained with the interest of 8%.