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Multiple Choice QuestionWhich of the following is the approximate internal rate of return for an investment that costs $45,880 and has net cash flows of $4,000 for 20 years?Present Value of 1RatePeriods5%6%8%10%200.37690.31180.21450.1486Present Value of an Annuity of 1RatePeriods5%6%8%10%2012.462211.46999.81818.5136Multiple choice question.6%8%5%10%

Question

Multiple Choice QuestionWhich of the following is the approximate internal rate of return for an investment that costs 45,880andhasnetcashflowsof45,880 and has net cash flows of 4,000 for 20 years?Present Value of 1RatePeriods5%6%8%10%200.37690.31180.21450.1486Present Value of an Annuity of 1RatePeriods5%6%8%10%2012.462211.46999.81818.5136Multiple choice question.6%8%5%10%

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Solution

To solve this problem, we need to calculate the present value of the cash flows and compare it to the initial investment.

The present value of the cash flows can be calculated using the formula for the present value of an annuity:

PV = C * [(1 - (1 + r)^-n) / r]

where:

  • PV is the present value,
  • C is the net cash flow per period,
  • r is the rate of return, and
  • n is the number of periods.

Given that the net cash flow (C) is $4,000 and the number of periods (n) is 20 years, we can plug these values into the formula and solve for r.

However, since we are given a table of present values for different rates, we can use this to find the approximate rate of return.

First, we calculate the present value factor for the cash flows:

PV factor = Initial investment / Net cash flow per period PV factor = 45,880/45,880 / 4,000 = 11.47

Looking at the table, we can see that the present value factor of 11.47 is closest to the factor for a rate of 6% over 20 periods.

Therefore, the approximate internal rate of return for the investment is 6%.

So, the answer is 6%.

This problem has been solved

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