Question

In: Accounting

You are the CFO of a business and have the opportunity to evaluate two different investment...

You are the CFO of a business and have the opportunity to evaluate two different investment opportunities. Information related to these investments follows:

Investment 1

Investment 2

Investment Cost

$   800,000

$   500,000

Salvage Value

$   40,000  

$   50,000  

Useful Life

8 years

15 years

Required Rate of Return

10%

10%

Sales

$   450,000

$   400,000

Variable Costs

$   150,000

$   175,000

Fixed Costs (excluding depreciation)

$   100,000

$   150,000

Tax Rate

35%

35%

Your company has a required rate of return of 10% for all new investments and is subject to a tax rate of 35%.

  1. Calculate the Internal Rate of Return for each investment using the IRR function in Excel. (Note your guess for the interest rate in the formula should be the required rate of return)

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