The internal rate of return method is used by Maxwell Construction Co. in analyzing a capital expenditure proposal that involves an investment of $45,420 and annual net cash flows of $12,000 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.

Exhibit 2:

 

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Present Value of an Annuity of $1 at Compound Interest 6% Year 10% 12% 15% 20% 0.870 0.943 0.909 0.893 0.833 1.736 1.690 1.626 1.833 1.528 2.283 3 2.673 2.487 2.402 2.106 3.170 4 3.465 3.037 2.855 2.589 3.605 2.991 4.212 3.791 3.353 3.785 4.917 4.355 4.111 3.326 5.582 4.868 4.564 4.160 3.605 5.335 8. 6.210 4.968 4.487 3.837 9. 6.802 5.759 5.328 4.772 4.031 6.145 10 7.360 5.650 5.019 4.192