Question

In: Finance

Rachel plans to open a coffee shop with her friends. After the initial investment, the project...

Rachel plans to open a coffee shop with her friends. After the initial investment, the project will generate $1 million per year for the next five years, and offers the internal rate of return (IRR) of 15%. What is the project's initial investment?

3,352,155.10

5,000,000

4,213,154.20

4,250,000

Expert Solution

The Correct option is 3352155.10

i.e. the project's initial investment is $ 3352155.10

Explanations and calculations.

first of all here we need to understand the meaning of IRR.

Internal rate of return (IRR) defined as the rate which equates the present value of each cash inflows with the present value of cash outflows (or initial investment) of an investment/project .

Or we can say that IRR is the rate at which the net present value (NPV) of the investment is zero.

NPV= PV of cash inflows - PV of cash outflows (or initial investment)

since in the question IRR is given so we can calculate the amount of initial investment

0= PV of cash flows - initial investment

since the annual cash inflows are constant so we can use PVIFA to calculate pv of cash inflows

0= annual cash inflows*PVIFA(15%,5years)- initial investment

0= 1000000*PVIFA(15%,5years)- initial investment

or

initial investment = 1000000*PVIFA(15%,5years)

initial investment = 1000000* 3.3521551

initial investment = 3352155.10

Hence the initial investment is $ 3352155.10

jeff jeffy answered 1 year ago

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