   Chapter 26, Problem 26.16EX

Chapter
Section
Textbook Problem

Internal rate of return method The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $156,218 and annual net cash flows of$38,000 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. Round to three decimal places. b. Using the factor determined in part (a) and the present value of an annuity of$1 table appearing in this chapter (Exhibit 5), determine the internal rate of return for the proposal.

a.

To determine

Internal rate of return method:

Internal rate of return method is one of the capital investment method which determines the rate of return wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method also called as the time-adjusted rate of return method, and it used to evaluate the different proposal’s expected rate of return.

To determine: The internal rate of return for the given project

Explanation

When the annual cash flows are equal, the internal rate of return can determined as follows:

Present value factor for an annuity of \$1}=Amount to

b.

To determine

To locate: The present value factor in annuity table (Exhibit 5).

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