29. The Steel Factory is considering a project that will produce cash inflows of $44,400 a...

29. The Steel Factory is considering a project that will produce cash inflows of $44,400 a year for five years. What is the internal rate of return if the initial cost of the project is $135,000?

15.45 percent 19.25 percent 11.95 percent 17.65 percent 13.15 percent

15.Chance, Inc. is considering a project with an initial cost of $1.02 million. The project will not produce any cash flows for the first two years. Starting in year 3, the project will produce cash inflows of $663,000 a year for 5 years. This project is risky, so the firm has assigned it a discount rate of 23.9 percent. What is the net present value?

Expert Solution

	Solution:-
29)	Ans:- IRR of prject = 19.25%
	Claculation of project IRR
	We have taken 19% and 20% discount factor for hit and trial method.
	Year	cash flow	PVF at 19%	Present value	PVF at 20%	Present value
	A	B	C	*D=BC**	E	*F=BE**
	1	$44,400.00	0.84033613	$37,310.92	0.833333	$37,000.00
	2	$44,400.00	0.70616482	$31,353.72	0.694444	$30,833.33
	3	$44,400.00	0.59341581	$26,347.66	0.578704	$25,694.44
	4	$44,400.00	0.49866875	$22,140.89	0.482253	$21,412.04
	5	$44,400.00	0.41904937	$18,605.79	0.401878	$17,843.36
			Total	$135,758.99		$132,783.18

	We have to use hit and trial method.
	PV of cash inflow at 19% =$135,758.99
	PV of cash inflow at 20%= $132,783.179

	The IRR of the project can be calculated as follows:-
IRR=Lower DR+ Difference b/w DRs{[PVCF of lower DR-initial investment]/Absolute difference B/w DRs cash flow.}
	Where, DR stands for discount rate
		PV stands for present value
		B/W stands for between.

	Now substituting values we get
		= 19%+1%{(135,758.99-135,000)/(135,758.99-132883.179)
		=19%+0.25%
		=19.25%

15)	Calcualtion of NPV
	Year	cash flow	PVF at 23.9%	Present value
	A	B	C	*D=BC**
	0	-$1,020,000.00	1	-$1,020,000.00
	1	$0.00	0.8071025	$0.00
	2	$0.00	0.65141445	$0.00
	3	$663,000.00	0.52575823	$348,577.71
	4	$663,000.00	0.42434078	$281,337.94
	5	$663,000.00	0.34248651	$227,068.56
	6	$663,000.00	0.27642172	$183,267.60
	7	$663,000.00	0.22310066	$147,915.74
			NPV	$168,167.54

	NPV of project = PV of inflows -PV of souflows
		=$168,167.54 ( as calculated above)
	Please feel free to ask if you have nay query in the comment section.

jeff jeffy answered 3 years ago

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