Question

Sheridan, Inc., a resort management company, is refurbishing one of its hotels at a cost of $7,156,793. Management expects that this will lead to additional cash flows of $1,650,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Sheridan go ahead with this project?

The IRR of this project is enter the IRR of this project in percentages rounded to 2 decimal places %

The firm should select an option                                                          rejectaccept the project

Answer 1

The IRR is the interest rate that makes the NPV of the project equal to zero. The IRR for this project is:

0 = -$7,156,793 + $1,650,000/(1 + IRR) + $1,650,000/(1 + IRR)^2 + $1,650,000/(1 + IRR)^3 + $1,650,000/(1 + IRR)^4 + $1,650,000/(1 + IRR)^5 + $1,650,000/(1 + IRR)^6

IRR = 10.14%

Reject the project