Long Life Floors is expected to pay an annual dividend of $7 a share and plans on increasing future dividends by 2 percent annua
1 answer:
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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%.
