US CMA Part 2 · Chapter 8 · Question 8 of 15
Talbot Freight can invest $400,000 in a project that produces after-tax cash inflows of $130,000 per year for 4 years. Which of the following is closest to the project's internal rate of return?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 11.4%
Explanation
At the IRR, the PV of inflows equals the investment, so the required annuity factor = $400,000 / $130,000 = 3.0769. The 4-year annuity factor is 3.1699 at 10% and 3.0373 at 12%, so the IRR lies between them; solving precisely gives 11.39%, or about 11.4%. 32.5% is the payback reciprocal and 7.5% is an undiscounted average return.
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