ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
A project requires an outlay of $100,000 now and produces a single cash inflow of $133,100 at the end of year 3. What is its IRR?
The IRR is 10%. The inflow of 133,100 divided by the outlay of 100,000 is 1.331, which equals 1.10 cubed, so the annual compound rate that discounts the year-3 inflow to the initial outlay is exactly 10%.
- A10.0%Correct
- B11.0%
- C33.1%
- D30.0%
Explanation
Set 100,000 = 133,100 / (1+r)^3, so (1+r)^3 = 1.331, giving 1+r = 1.10 and r = 10%. Dividing the 33.1% total return by 3 gives 11.0%, which ignores compounding. The 33.1% option is the total, not annual, return.
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