Question

Park Co. is considering an investment that requires immediate payment of $21,530 and provides expected cash inflows of $6,500 annually for four years. Assume Park Co. requires a 7% return on its investments.
What is the internal rate of return?

Answer 1

Answer:

8.00%

Explanation:

The internal rate of return is the rate of return on the investment which gives a zero net present value.

IRR can be computed using excel IRR function as shown below:

=IRR(values)

values are the cash flows arranged from the earliest( year zero ) to the latest (year 4) as contained in the attached.

IRR=8.00%

The IRR is proven thus:

NPV=-$21,530+$6500/(1+8%)^1+$6500/(1+8%)^2+$6500/(1+8%)^3+$6500/(1+8%)^4=-$1.18(which is very close to zero)

Download xlsx