Answer:
20%
Explanation:
Internal rate of return (IRR) is the interest rate at which net present value of all cash flows becomes zero. It measure the profitability of the investment.
Formula for IRR is as follow
IRR = Lower rate + [ Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] (higher rate - lower rate)
To determine IRR we need to calculate NPV at two different discount rates
10%
Net Present value = Present value of Cash inflow - Initial Investment
Net Present value = ($6,000 ( 1 + 10% )^-1 ) - $5,000
Net Present value = $5,454.55 - $5,000
NPV = 454.55
15%
Net Present value = Present value of Cash inflow - Initial Investment
Net Present value = ($6,000 ( 1 + 15% )^-1 ) - $5,000
Net Present value = $5,217.39 - $5,000
NPV = 217.39
Now Place the values in IRR Formula
IRR = 10% + [ 454.55 / (454.55 - 217.39) ] (15% - 10%)
IRR = 19.58% = 20% (rounded to nearest whole percentage)
