Answer (A) is correct . First, calculate the annual earnings and cash flows: Operating revenues $400,000 Less depreciation 300,000 ? Book income 100,000 Cash flow 400,000 IRR is calculated by trial and error. Calculate the NPV at different discount rates. NPV at 10% = ($400,000 × discount factor for 10%, 5 years) – $1,500,000 = $400,000 × 3.791 – $1,500,000 = $16,400 NPV at 11% = $400,000 × 3.696 – $1,500,000 = –$21,600 Thus, IRR lies between 10% and 11%. By interpolation, the actual IRR appears to be 10.43% {10 + [16,400 ÷ (16,400 + 21,600)}. NOTE: ?The Test Prep NPV tables do not contain the factor for 11%. You can deduce the answer using the factor for 12%, but you can’t interpolate.
Answer (B) is incorrect because It uses something other than cash flows in the calculation.
Answer (C) is incorrect because It uses something other than cash flows in the calculation.
Answer (D) is incorrect because It uses something other than cash flows in the calculation.
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