Asked by Siti nur Jannah on Jul 04, 2024
Verified
Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for seven years. The present value factors for an annuity of $1 for seven years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is
A) 10%
B) 6%
C) 12%
D) 8%
Internal Rate of Return
The metric used to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows equal to zero.
Cash Outlay
The total amount of cash that is spent by a business or organization for certain purposes or activities, including investments or expenses.
Present Value Factors
Quantitative metrics used to calculate the current worth of a future sum of money or stream of cash flows given a specific discount rate.
- Compute the internal rate of return and understand its significance in making investment decisions.
Verified Answer
JH
Jordan HurstJul 06, 2024
Final Answer :
D
Explanation :
To find the internal rate of return (IRR), we need to match the initial investment with the present value of the expected cash flows. The initial investment is $208,240, and the annual cash flow is $40,000. By multiplying the annual cash flow by the present value factor, we aim to find a product close to the initial investment. Using the given present value factors, the calculation closest to the initial investment is $40,000 * 5.206 (for 8%) = $208,240. Therefore, the IRR is closest to 8%.
Learning Objectives
- Compute the internal rate of return and understand its significance in making investment decisions.