The internal rate of return method is used by Merit Construction Co. in analyzing a capital expenditure proposal

The internal rate of return method is used by Merit Construction Co. in analyzing a capital expenditure proposal that involves an investment of $82,220 and annual net cash flows of $20,000 for each of the six years of its useful life.

a. Determine a present value factor for an annuity of $1, which can be used in determining the internal rate of return.

b. Using the factor determined in part (a) and the present value of an annuity of $1 table appearing in this chapter (Exhibit 2), determine the internal rate of return for the proposal.


Answer:

a. 
Present Value Factor for an 
Annuity of $1 for 6 Periods  = 

= 
Amount to Be Invested 
Annual Net Cash Flow 

$82,220 
$20,000 
b. 12% 
= 4.111 

Row 6 in Exhibit 2. The column associated with the factor 4.111 is 12%.