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Ambiguity Specialists is evaluating the following project. What is the largest Internal Rate of Return associated...

Ambiguity Specialists is evaluating the following project. What is the largest Internal Rate of Return associated with this project?

Year Cash Flow

0 -$10,000

1 $8,000

2 $10,000

3 $12,000

4 $14,000

5 -$40,000

Answers:

a. This project has zero IRRs

b. 12.57 percent

c. 86.45 percent

d. 101.09 percent

e. 62.27 percent

Expert Solution

answer is option B = 12.57%

irr is the discount factor where NPV is zero

project's NPV calculation (when 10%)
year	cash inflow	pvf @ 10%	present value of cash inflow
1	8000	0.9091	7272.7273
2	10000	0.8264	8264.4628
3	12000	0.7513	9015.7776
4	14000	0.6830	9562.1884
5	-40000	0.6209	-24836.85
Total present value	9278.30
(less) cash outflow	-10000.00
Net Present Value (NPV)	-721.70

project's NPV calculation (when 15%)
year	cash inflow	pvf @ 15%	present value of cash inflow
1	8000	0.8696	6956.5217
2	10000	0.7561	7561.4367
3	12000	0.6575	7890.1948
4	14000	0.5718	8004.5454
5	-40000	0.4972	-19887.07
Total present value	10525.63
(less) cash outflow	-10000.00
Net Present Value (NPV)	525.63

IRR = Lowest rate + [(NPV at lowest rate)/(NPV at lowest rate –NPV at highest rate)] * difference in rate

Project A

IRR= 10+(-721.7)/( -721-(525.63))]*15-10

= 10+[-721.7/-1247.33]*5

= 10+( 0.57*5)

= 10+2.8 = 12.8

IRR for the project = 12.8%

answer is option B = 12.57%

project's NPV calculation
year	cash inflow	pvf @ 12.57%	present value of cash inflow
1	8000	0.8883	7106.6892
2	10000	0.7891	7891.4111
3	12000	0.7010	8412.2709
4	14000	0.6227	8718.4117
5	-40000	0.5532	-22128.23
Total present value	10000.55
(less) cash outflow	-10000.00
Net Present Value (NPV)	0.55

note:- IRR is zero when we are not getting any return on investment. here we have return

jeff jeffy answered 2 years ago

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