Clean Tel, Inc. is considering investing in an 11-year project with annual cash inflows of $1,000,000. These cash inflows have an initial investment of $7,139,000. At what discount rate would this present value be the same as the initial investment?

a. 6%

b. 7%

c. 9%

d. 8%

d. 8%

Explanation:

The computation of the discount rate is shown below:

Initial investment = Present value of cash inflows

where,

Initial investment is $7,139,000

And, the present value of cash inflows

= Annual cash inflows × discount rate

We assume the discount rate be X

$7,139,000 = $1,000,000 × X

So,

X = 7139000 ÷ 1000000 = 7.139

= 8%

We simply applied the above formula in order to find out the discount rate

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