Question

Solution 1:

Annual net cash inflows = \$1,300,000 - \$1,000,000 = \$300,000

Initial investment = \$730,671

Present value factor at IRR = Initial investment / Annual net cash inflows = \$730,671/ \$300,000 = 2.43557

Refer PV Factor table at period 5, this factor falls at IRR = 30%

Hence IRR = 30%

Solution 2:

Annual cash inflows = \$1,200,000 - \$1,000,000 = \$200,000

 Computation of NPV Particulars Period Amount PV factor at 12% Present Value Cash outflows: Initial investment 0 \$700,000.00 1 \$700,000 Present Value of Cash outflows (A) \$700,000 Cash Inflows Annual cash inflows 1-5 \$200,000.00 3.6048 \$720,956 Present Value of Cash Inflows (B) \$720,956 Net Present Value (NPV) (B-A) \$20,956

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