18% is the company's cost of capital, which is given in the question.
The internal rate of return is the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows, or the discount rate at which the net present value is zero. To determine the internal rate of return from the information given, we need to first know what discount factor for five years would result in a present value of $9,950 that is equal to $4,000. To arrive at that factor, we divide $4,000 by $9,950, and we get .402. We then look along the line of factors for five years on the factor table given to locate a factor close to .402. That is .4019, which is in the 20% column. Thus, the internal rate of return is closest to 20%.
The internal rate of return is the discount rate at which the present value of the expected cash inflows from a project equals the present value of the expected cash outflows, or the discount rate at which the net present value is zero. A positive NPV would result from using a discount rate of 15%, so that cannot be the project's IRR.
16% is approximately the internal rate of return for project A, but the question asks for the internal rate of return for project B.
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Project B's internal rate of return is closest to:
