Golda is considering a project which requires an amount of ?$3000.00 and another amount of ?$1000.00...

Golda is considering a project which requires an amount of ?$3000.00 and another amount of ?$1000.00 ????? 1 ????. After two years’ time, when the project ends, she expects an inflow of ?$4500.00. what is the internal rate of return (???) of this project? Is the above Investment profitable? Assume that Golda can lend and borrow at the same fixed rate of 7.13% per annum.

Solutions

Expert Solution

Computation of IRR using trial and error method:

Computation of IRR using discount rate of 6 %.

Year	Cash Flow ©	Computation of PV Factor	PV Factor @ 6 % (F)	PV (C x F)
0	-3000	1/(1+0.06)^0	1	-3000
1	-1000	1/(1+0.06)^1	0.94339622642	-943.3962264
2	4500	1/(1+0.06)^2	0.88999644001	4004.9839801
			NPV1	61.5877536

As NPV is positive, let’s compute NPV at discount rate of 7 %.

Year	Cash Flow (C)	Computation of PV Factor	PV Factor @ 7 % (F)	PV (C x F)
0	-N$3,000	1/ (1+0.07) ^0	1	-N$3,000
1	-1,000	1/ (1+0.07) ^1	0.93457943925	-934.5794393
2	4,500	1/ (1+0.07) ^2	0.87343872827	3,930.4742772
			NPV2	-4.1051621

IRR = R1 + [NPV1 x (R2 – R1)/ (NPV1 – NPV2)]

= 6 % + [N$61.5877537 x (7 % – 6 %)/ (N$61.5877537 –(-N$4.1051621))]

= 6 % + [N$61.5877537 x 1 %/ (N$61.5877537 + N$4.1051621)]

= 6 % + [N$61.5877537 x 0.01/ (N$65.6929157)]

= 6 % + (N$0.615877537 / N$65.6929157)

= 6 % + 0.009375098

= 6 % + 0.94 % = 6.94 %

Internal rate of the project is 6.94 %

As the IRR of the project, 6.94 % is less than lending and borrowing rate of Golda, the project is not profitable.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Elemental is considering another project which requires new equipment at a cost of $70,000. The equipment...

Elemental is considering another project which requires new equipment at a cost of $70,000. The equipment has a 3 year tax life and will be fully depreciated by the straight-line method over 3 years. When the project closes down at the end of the third year, it is expected to sell for $5000 before taxes. The project will require new working capital of $10000, and is expected to be fully recovered at the end of the project's life. Project revenues...

Orcid Berhad is considering a project which requires an investment of RM200,000, and the managers are...

Orcid Berhad is considering a project which requires an investment of RM200,000, and the managers are somewhat confident of their estimates of all the project’s cash flow variables except for unit sales. Further, they consider a drop in sales below 30,000 units or a rise above 50,000 units as being extremely unlikely. The selling price per unit is RM20. The labor costs per unit are RM8 and the material costs per unit are RM3. The fixed costs are RM50,000 per...

NDA Inc. is considering a project which requires the purchase of a $160,000 machine. The CCA...

NDA Inc. is considering a project which requires the purchase of a $160,000 machine. The CCA rate is 30%. When the project ends at year 7, its residual value is expected to be $18,000. This machine is the only asset in the asset class which terminates when the project ends. The project is expected to generate before tax cash flow of $38,000 per year for 7 years. If the project is all financed by equity, the cost of capital would...

ATT is considering a project. The project requires to purchase an equipment with a cost of...

ATT is considering a project. The project requires to purchase an equipment with a cost of $1.55 million. The equipment will be depreciated straight-line to a zero book value over the 9-year life of the project. At the end of the project it will be sold for a market value of $240,000. The project will not change sales but will reduce operating costs by $399,000 per year. The project also requires an initial investment of $52,000 in net working capital,...

You are considering a project which requires $136,000 in external financing. The flotation cost of equity...

You are considering a project which requires $136,000 in external financing. The flotation cost of equity is 11 % and the cost of debt is 4.5 %. You wish to maintain a debt-equity ratio of.45. What is the initial cost of the project including the flotation costs? Multiple Choice $149,422 $143,367 $155,283 $138,009 $154,004

18 A firm is considering an investment project which requires the initial outlay of $10 million....

18 A firm is considering an investment project which requires the initial outlay of $10 million. The 12-year project is expected to generate annual net cash flows each year of $1 million and have the expected terminal value at the end of the project of $5 million. The cost of capital is 6 percent, and its marginal tax rate is 40 percent. Calculate the profitability index of this project. 0.84 0.09 1.70 1.34 1.09

Somme plc (Somme) is considering an investment project which requires an initial investment in machinery of...

Somme plc (Somme) is considering an investment project which requires an initial investment in machinery of HK$40 million, payable at the start of the first year of operation. At the end of three years this machinery will be traded in for HK$3,000,000 and if demand for the product is still strong new machinery will be purchased. The initial HK$40 million investment will attract capital allowances at a rate of 20% per annum on a reducing balance basis. The rate of...

Company XYZ is considering project A. Project A requires an initial investment of $75,000.

Company XYZ is considering project A. Project A requires an initial investment of $75,000. It generates $35,000 each year for the coming 3 years. What is the discounted payback period for this project if the proper discount rate is 18%?

An investor is considering investing in a capital project. The project requires an outlay of £500,000...

An investor is considering investing in a capital project. The project requires an outlay of £500,000 at outset and further payments at the end of each of the first 5 years, the first payment being £100,000 and each successive payment increasing by £10,000.The project is expected to provide a continuous income at a rate of £80,000 in the first year, £83,200 in the second year, and so on, with income increasing each year by 4% per annum compound. The income...

Lincoln Inc. is considering a new project which requires an initial investment of $6 million today....

Lincoln Inc. is considering a new project which requires an initial investment of $6 million today. The investment involves the purchase of a machine with a CCA rate of 30%. Revenues less expenses for this project are expected to be $2 million per year for 4 years. The project requires an immediate $200,000 increase in net working capital and the working capital will grow at 3% each year in the following years. Lincoln Inc. expects to sell the machine at...

Subjects