Question

Blossom, Inc., a resort management company, is refurbishing one of its hotels at a cost of $8,554,779. Management expects that this will lead to additional cash flows of $1,970,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Blossom go ahead with this project? (Round answer to 2 decimal places, e.g. 5.25%.)

The IRR of this project is _______________%

The firm should select an option (accept, Reject) the project

Answer 1

Ans IRR = 10.10%

Since IRR is less than the appropriate cost of capital the project must not be accepted.

Year	Project Cash Flows (i)	DF@ 14%	DF@ 14% (ii)	PV of Project A ( (i) * (ii) )	DF@ 10% (iii)	PV of Project A ( (i) * (iii) )
0	-8554779	1	1	(85,54,779.00)	1	(85,54,779.00)
1	1970000	1/((1+14%)^1)	0.877	17,28,070.18	0.909	17,90,909.09
2	1970000	1/((1+14%)^2)	0.769	15,15,851.03	0.826	16,28,099.17
3	1970000	1/((1+14%)^3)	0.675	13,29,693.89	0.751	14,80,090.16
4	1970000	1/((1+14%)^4)	0.592	11,66,398.15	0.683	13,45,536.51
5	1970000	1/((1+14%)^5)	0.519	10,23,156.27	0.621	12,23,215.01
6	1970000	1/((1+14%)^5)	0.456	8,97,505.50	0.564	11,12,013.64
	10.10%	NPV		(8,94,103.99)	NPV	25,084.58
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 25084.58 / (25084.58 + 894103.99) * 4%
		10.10%