Question
In: Finance
A project will produce an operating cash flow of $15,200 a year for four years. The...
A project will produce an operating cash flow of $15,200 a year for four years. The initial cash investment in the project will be $50,000. The net after-tax salvage value is estimated at $4,000 and will be received during the last year of the project’s life. What is the internal rate of return for this project? Should the project be accepted if the cost of capital is 10%?
Group of answer choices
8.31%; No, project should be rejected
10.81%; Yes, project should be accepted
8.31%; Yes, project should be accepted
10.81%; No, project should be rejected
10.25%; Yes, project should be accepted
Solutions
Expert Solution
Ans 10.81%; No, project should be rejected
Project must be rejected when IRR exceed cost of capital
| Year | Project Cash Flows (i) | DF@ 5% | DF@ 5% (ii) | PV of Project ( (i) * (ii) ) | DF@ 15% (iii) | PV of Project ( (i) * (iii) ) |
| 0 | -50000 | 1 | 1 | (50,000.00) | 1 | (50,000.00) |
| 1 | 15200 | 1/((1+5%)^1) | 0.952381 | 14,476.19 | 0.870 | 13,217.39 |
| 2 | 15200 | 1/((1+5%)^2) | 0.907029 | 13,786.85 | 0.756 | 11,493.38 |
| 3 | 15200 | 1/((1+5%)^3) | 0.863838 | 13,130.33 | 0.658 | 9,994.25 |
| 4 | 19200 | 1/((1+5%)^3) | 0.822702 | 15,795.89 | 0.572 | 10,977.66 |
| NPV | 7,189.26 | NPV | (4,317.32) | |||
| IRR = | Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) | |||||
| 5% + 7189.26 / (7189.26 + 4317.32)*10% | ||||||
| 10.81% | ||||||
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