A project costing $504,100 is projected to have the following before tax operating cash flows (BTCFO)...

A project costing $504,100 is projected to have the following before tax operating cash flows (BTCFO) for the next 5 years: $100,000 $125,000, $150,000, $160,000, and $175,000. In addition, the property is expected to be sold at the end of 5 years for a net cash amount of $600,000 (BTCFS). If you were to partition the BTIRR of this project, based on BTCFO and BTCFS, what proportions of the BTIRR would be represented by each?

66.0%/34.0%

50.3%/49.7%

40.0%/60.0%

73.5%/26.5%

Expert Solution

Year	cashflow
0	-5,04,100
1	1,00,000
2	1,25,000
3	1,50,000
4	1,60,000
5	7,75,000
IRR	28.50%

IRR Partition
Year	BTCFO	PV @28.50%	(BTCFS)	PV @28.50%	Total	PV
1	100000	77,821	0	0	100000	77,821
2	125000	75,701	0	0	125000	75,701
3	150000	70,694	0	0	150000	70,694
4	160000	58,682	0	0	160000	58,682
5	175000	49,948	600000	171252	775000	2,21,200
		3,32,847		171252	1310000	504099
	66% (3,32,847/504099)		34%(1310000/504099)

The corrrect answer is option A i.e. 66% from BTCFO and 35% from BTCFS

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