Question

Gore Global is considering the two mutually exclusive projects below. The cash flows from the projects are summarized below.

Year ManBearPig Project Cash Flow Flying Car Cash Flow
0 -$100,000 -$200,000
1 25,000 50,000
2 25,000 50,000
3 50,000 80,000
4 50,000 100,000
What is the Flying Car's internal rate of return (IRR) at a 12% cost of capital?

A) 12.7%

B) 14.6%

C) 15.9%

D) 13.0%

E) 10.0%

Answer 1

Answer:

D

Explanation:

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator  

Flying Car

Cash flow in year 0 = -$200,000

Cash flow in year 1 = 50,000

Cash flow in year 2 = 50,000

Cash flow in year 3 =80,000

Cash flow in year 4 =100,000

IRR = 13%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.