Study Exhibit 10-2. Suppose the annual cash inflow will be $2,500 rather than $2,000. What is the internal rate of return? 

Exhibit 10-2

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Oniginal investment, $6,075. Useful lif,for yar. Anual csh inflow from operations, $2,00 Itenal rate of retum (seleted by ril-and-error methods), 12 percent. Total present values are rounded to the nearest dollr. Sketch of Cash Flows at End of Year Present Value of $1, Discounted Total Present Value 2 3 at 12% 1 Approach 1: Discounting Each Year's Cash Inflow Separately Cash flows: Annual savings 0.8929 $1,786 - $2,000 $2,000 0.7972 1,594 1,424 1,271 $6,075 (6,075) - $2,00 0.7118 0.6355 - $2,000 Present value of future inflows Initial outlay Net present value (the zero diffrence roves that the rate of return is 12%) $(6,075) 1.000 Approach 2: Using Annuity Table Annual savings Initial outlay Net present value 3.0373 – $2,000 $2,000 $2,000 $2,000 $6,075 (6,075) 1.0000 S(6,075) "Present values from Table 1, Appendix B. Present values of annuity from Table 2, Appendix B.