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QUESTION 11 Present value of an Annuity of $1 in Arrears ​ Periods 4% 6% 8%...

QUESTION 11

Present value of an Annuity of $1 in Arrears

Periods

4%

6%

8%

10%

12%

14%

1

0.962

0.943

0.926

0.909

0.893

0.877

2

1.886

1.833

1.783

1.736

1.690

1.647

3

2.775

2.673

2.577

2.487

2.402

2.322

4

3.630

3.465

3.312

3.170

3.037

2.914

5

4.452

4.212

3.993

3.791

3.605

4.433

6

5.242

4.917

4.623

4.355

4.111

3.889

7

6.002

5.582

5.206

4.868

4.564

4.288

8

6.733

6.210

5.747

5.335

4.968

4.639

9

7.435

6.802

6.247

5.759

5.328

4.946

10

8.111

7.360

6.710

6.145

5.650

5.216

Ruby Company is considering a project with an initial investment of $300,000 that will yield annual net cash flows of $90,580 and will be depreciated at $75,000 per year over its 4 year life. What is the internal rate of return? (Note: Round the discount factor to three decimal places.)

a.

12%

b.

10%

c.

8%

d.

14%

e.

6%

0 0
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Answer #1

c.8%.

IRR is the rate at which the present value of cash outflow equal present value of cash inflows.

here,

present value of cash outflows = $300,000

present value of cash inflows = $90,580 * present value of annuity factor

at IRR

$300,000 = 90,580 * present value of annuity factor

=> present value of annuity factor = 300,000 / 90,580

=>3.312.

from the table of annuity

we can see that for 4 periods, the factor 3.312 falls under 8%.

so the IRR for the given problem is 8%.

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