A company invested $500,000 in a new project. The project is expected to yield annual incremental cash flows of $175,000 for 4 years. What is the approximate internal rate of return (IRR) for this project?

Answer (B) is correct. The IRR of an investment is the discount rate at which the investment’s NPV equals 0. In other words, it is the rate that makes the present value of the expected cash inflows equal the present value of the expected cash outflows. The PV factor of an annuity at 15% for a period of 4 years is equal to 2.855 ($175,000 × 2.855 = $499,625, which is about $500,000). Therefore, 15% is the IRR because the NPV would equal $0 ($500,000 – $500,000)