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Problem 8-26 (continued)
4. The formula for the internal rate of return is:
Investment required
Factor of the internal =
rate of return Net annual cash inflow
€480,000
= = 4.4 (rounded)
€108,000
Looking at Exhibit 8B-2 in Appendix 8B, and reading along the 12-period
line, a factor of 4.4 would represent an internal rate of return of
approximately 20%.
Note that the payback and internal rate of return methods would
indicate that the investment should be made. The simple rate of return
method indicates the opposite since the simple rate of return is less
than 16%. The simple rate of return method generally is not an accurate
guide in investment decisions.
Problem 8-28 (continued)
4. a. The expected annual cash inflow would be:
$37,500 × 120% = $45,000
$142,950 = 3.177
$45,000
