Question

In: Finance

The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing...

The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as​ follows:

Year

Project Cash Flow

0

          ​ ?

1

​$760,000

2

  420,000

3

  310,000

4

  470,000

If you know that the project has a regular payback of 2.6 years, what is the​ project's IRR?

The IRR of the project is ___​%.

Solutions

Expert Solution

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

Hence initial cost=760,000+420,000+(310,000*0.6)

=$1,366,000

Let irr be x%
At irr,present value of inflows=present value of outflows.

1,366,000=760,000/1.0x+420,000/1.0x^2+310,000/1.0x^3+470,000/1.0x^4

Hence x=irr=18.46%(Approx)


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