The internal rate of return method is used by Tester-man Construction Co. in analyzing a capital expenditure proposal that involves an investment of $113,550 and annual net cash flows of $30,000 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 5), determine the internal rate of return for the proposal.
Exhibit 5: Present Value of $1 at Compound Interest

Transcribed Image Text:

Periods 4% 5% 5 % 13% 0.96154 0956940 095238 094787 0.94340 0.93897 0.93458 0.90909 0.90090 0.89286 0.88496 0.92456 0915730 0.90703 0.89845 0.89000 0.88166 0.87344 0.82645 0.81 162 0.79719 0.78315 1% 1 0% 11% 12% 3 0.88900 0876300 0.86384 085161 0.83962 0.82785 0.81630 0.75131 0.73119 0.71178 0.69305 0.85480 0838560 0.82270 080722 0.79209 0.77732 0.76290 068301 0.65873 0.63552 0.61332 5 0.82193 0.802450 0.78353 0.76513 0.74726 0.72988 0.71299 062092 0.59345 0.56743 0.54276 6 0.79031 0.767900 0.74622 0.72525 0.70496 0.68533 0.66634 056447 0.53464 0.50663 0.48032 7 0.75992 0.734830 0.71068 068744 0.66506 0.64351 0.62275 051316 048166 0.45235 0.42506 8 0.73069 0.703190 0.67684 065160 0.62741 0.60423 0.58201 046651 0.43393 0.40388 0.37616 9 0.70259 0672900 0.64461 061763 0.59190 0.56735 0.54393 042410 0.39092 0.36061 0.33288 0.67556 0643930 0.61391 058543 0.55839 0.53273 0.50835 038554 0.35218 0.32197 0.29459 05583 056735058201 051316 053464 0385s4 039092 s002 0.7625078270 0543930 064461 055160 066505 068533 071209 0580