Question
In: Accounting
Chandler Chairs is considering an equipment investment that will cost $945,000. Projected net cash inflows over...
Chandler Chairs is considering an equipment investment that will cost $945,000.
Projected net cash inflows over the? equipment's three-year life are as? follows: Year? 1:$490,000?;
Year? 2: $402,000?; and Year? 3: $282,000. Chandler wants to know the? equipment's IRR.
LOADING...
?(Click the icon to view the present value annuity? table.)
LOADING...
?(Click the icon to view the present value factor? table.)
LOADING...
?(Click the icon to view the future value annuity? table.)
LOADING...
?(Click the icon to view the future value factor? table.)
Requirement
Use trial and error to find the IRR within a? 2% range.
?(Hint?:
Use Chandler?'s hurdle rate of 10?% to begin the? trial-and-error process.) Use a business calculator or spreadsheet to compute the exact IRR. Begin by calculating the NPV at three? rates:
10?%,
12?%,
and
1414?%.
?
Begin by calculating the NPV at three? rates: 10?%, 12?%, and 14?%. ?(Round your answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present? values.)
Solutions
Expert Solution
Solution:
| Computation of NPV | ||||||||
| Particulars | Period | Amount | Discount rate - 10% | Discount rate - 12% | Discount rate - 14% | |||
| PV factor | Present Value | PV factor | Present Value | PV factor | Present Value | |||
| Cash outflows: | ||||||||
| Initial Investment | 0 | $945,000 | 1 | $945,000 | 1 | $945,000 | 1 | $945,000 |
| Present Value of Cash outflows (A) | $945,000 | $945,000 | $945,000 | |||||
| Cash Inflows | ||||||||
| Annual Cash Inflows: | ||||||||
| Year 1 | 1 | $490,000 | 0.90909 | $445,455 | 0.89286 | $437,500 | 0.87719 | $429,825 |
| Year 2 | 2 | $402,000 | 0.82645 | $332,231 | 0.79719 | $320,472 | 0.76947 | $309,326 |
| Year 3 | 3 | $282,000 | 0.75131 | $211,871 | 0.71178 | $200,722 | 0.67497 | $190,342 |
| Present Value of Cash Inflows (B) | $989,557 | $958,694 | $929,492 | |||||
| Net Present Value (NPV) (B-A) | $44,557 | $13,694 | -$15,508 | |||||
As NPV is positive at discount factor 12% and NPV is negative at discount factor 14% therefore IRR falls between 12% to 14%.
IRR = 12% + (NPV at 12% - NPV at IRR) / (NPV at 12% - NPV at 14%)*2
= 12% + ($13694 - 0) / ($13,694 + $15,508)*2 = 12.94%
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