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.

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

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