Question

The upfront cost of the project is $30,000. The company has estimated that it can generate cash flows of $10,000 in each of the next two years, and then a final $20,000 cash flow before the brewing system has to be replaced. The company plans to depreciate the system over 3 years with annual straight-line depreciation expenses of $10,000. As part of its analysis the company plans to perform a capital budgeting analysis to assess the viability of the purchase. You have been hired to perform the analysis. You have estimated what you feel is an appropriate discount is 8.00%. As part of your analysis, determine the IRR and NPV for this investment:

	A.	13.49% / $4,375.45
	B.	14.56% / $2,768.40
	C.	13.94% / $4,375.45
	D.	14.56% / $3,709.55
	E.	13.94% / $3,709.55

Answer 1

Year	Cash flows of Alpha	Discount factor @ 8%	Present Value@8%	Discount factor @ 13.94%	Present [email protected]%
-	-30,000.00	1.00	-30,000.00	1.00	-30,000.00
1.00	10,000.00	0.93	9,259.26	0.88	8,776.55
2.00	10,000.00	0.86	8,573.39	0.77	7,702.78
3.00	20,000.00	0.79	15,876.64	0.68	13,520.77
		NPV	3,709.29	NPV	-
IRR	13.94%

Explaination:-
Internal rate of return is the rate where NPV of the project is zero. To calculate IRR, we should set NPV is equal to zero and solve for discount rate which is the IRR.
Using trial and error method we guessed the discounting rate to be 13.94% .

Hence the correct answer is option d i.e. 13.94%/ $3709.55