Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

A project has the following cash flows:\[\begin{align}\text{Year 0:} & \ -\$10,000 \\\text{Year 1:} & \ +\$4,000 \\\text{Year 2:} & \ +\$4,000 \\\text{Year 3:} & \ +\$4,000 \end{align}\]What is the internal rate of return (IRR) for this project (rounded to the nearest whole percent)?

23%

28%

12%

18%

Previous problemNext problem

Verified step by step guidance

Step 1: Understand the concept of Internal Rate of Return (IRR). IRR is the discount rate at which the net present value (NPV) of all cash flows equals zero. It represents the project's break-even rate of return.

Step 2: Write the NPV formula for the cash flows provided. The formula is: $ NPV = \sum_{t=0}^{n} \frac{C_t}{(1 + r)^t} $, where $ C_t $ is the cash flow at time $ t $, $ r $ is the discount rate (IRR), and $ n $ is the number of periods.

Step 3: Substitute the given cash flows into the NPV formula: $ NPV = \frac{-10000}{(1 + r)^0} + \frac{4000}{(1 + r)^1} + \frac{4000}{(1 + r)^2} + \frac{4000}{(1 + r)^3} $. Simplify the equation to find $ r $ such that $ NPV = 0 $.

Step 4: Use trial-and-error or financial calculator/software to solve for $ r $. Start with the given answer choices (23%, 28%, 12%, 18%) and calculate the NPV for each rate. The correct IRR will make $ NPV $ closest to zero.

Step 5: Once the correct $ r $ is identified, verify that it satisfies the condition $ NPV = 0 $ using the substituted cash flows. This confirms the IRR for the project.