A company is considering an iron ore extraction project that requires an initial investment of and will yield annual cash inflow
s of for years. The company's discount rate is 9%. Calculate IRR.
1 answer:
Answer: D. 15%
Explanation:
The IRR is the discount rate that will make the Net Present Value to be 0.
In other words, the IRR is the discount rate that will make the cash inflow from the investment to be equal to the investment amount.
As the cashflow is constant, it is an annuity and so can be calculated by the Present Value Interest Factor.
Investment cost = $1,100,000
Using the options given;
Discount rate - 14%
Present Value of Cash inflow = 676,507 * Present Value of Annuity factor, 14%, 2 years
= 676,507 * 1.647
= $1,114,207.029
1,114,207.029 ≠ 1,100,000
Discount rate - 15%
Present Value of Cash inflow = 676,507 * Present Value of Annuity factor, 15%, 2 years
= 676,507 * 1.626
= $1,100,000.382
= $1,100,000
IRR is 15% as Present value of Cash inflow is equal to Investment cost at a discount rate of 15%.
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