Answer:
Annual cash flow = $1, 613
Internal rate of return = 12%
Explanation:
The internal rate of return ( I.R.R) is the discount rate that makes the present value of cash inflows to be equal to the present value of cash inflow.
The investment to inflow ratio = <u>Investment</u>
Annual cash inflow
6.2 = <u>10,000</u>
y
6.2 × y = 10,000
y = 10,000/6.2
= 1,613
Annual cash inflow = $1,613
The internal rate of return,for this question, is the discount rate that equates the present value (PV) of $1, 613 for 12 years to 10,000
Present Value of Annuity = Annual cash flow × Annuity factor
10,000 = 1 612.9 × 6.2.
<em>Note that the annuity factor is given as 6.2</em>
To determine the rate that produces an annuity factor of 6.2, we use the Present Value of Annuity table.
Using the table,
We locate 12 under column labeled <em>" n </em>" - i.e no of periods, we look up for the figure 6.2 in the row opposite 12. The closest figure found is 6. 1944. Finally, we look up ( look upward )to find the rate that produces this figure, and it is 12%.
<em>Note : Using the table, the intersection of 12% and 12 years gives the annuity factor 6.2</em>
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Annual cash flow = $1, 613
Internal rate of return = 12%
