91Ó°ÊÓ

Capital budgeting is the technique used by the investors to determine the different available investment options. It includes methods such as the payback method, Net present value, and IRR.

Internal rate of return using the formula:

$$\begin{gathered} NPW=\underset{t=0}{\overset{T}{∑}}\frac{C_t}{{\left(1+IRR\right)}^t} \\ 0=\left(\begin{array}{c}\frac{-22,802}{{\left(1+IRR\right)}^0}+\frac{\$3,500}{{\left(1+IRR\right)}^1}+\frac{\$3,500}{\left(1+IRR\right)}+\\ \frac{\$3,500}{{\left(1+IRR\right)}^3}+\frac{\$3,500}{{\left(1+IRR\right)}^4}+\frac{\$3,500}{{\left(1+IRR\right)}^5}+\\ \frac{\$3,500}{{\left(1+IRR\right)}^7}+\frac{\$3,500}{{\left(1+IRR\right)}^0}+\frac{\$3,500}{{\left(1+IRR\right)}^7}+\frac{\$3,500}{{\left(1+IRR\right)}^8}+\\ \frac{\$3,500}{{\left(1+IRR\right)}^9}\end{array}\right) \\ IRR=7\% \end{gathered}$$

Internal rate of return using Appendix D: Present value of an annuity

$$\begin{gathered} P{V}_{IFA}=\frac{Initialinvestment}{Cashfloweachyear} \\ =\frac{\$22,802}{\$3,500} \\ =6.515 \end{gathered}$$

For n=9, we will find 6.515 under the column of 7%. Therefore, the internal rate of return of the project is 7%.

Important Note: The internal rate of return is lower than the cost of capital. Therefore the project must not be accepted.