Question

In: Finance

modern refurbishing inc. is considering a project that has the following cash flow data. What is...

modern refurbishing inc. is considering a project that has the following cash flow data. What is the project IRR? Note that a projects IRR can be less than the cost of capital (and even negative, In which case will it be rejected.

Year 0 1 2 3

CF -$900 $330 %315 $300 $270

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Expert Solution

Answer:

We will calculate IRR using interpolation method.

Year CF PV at 12% Discounted Cash flows
0    -900.00 1                            -900.00
1     330.00 0.8929                              294.66
2     315.00 0.7972                              251.12
3     300.00 0.7118                              213.54
4     270.00 0.6355                              171.59
                               30.90
Year CF PV at 16% Discounted Cash flows
0    -900.00 1                            -900.00
1     330.00 0.8621                              284.49
2     315.00 0.7432                              234.11
3     300.00 0.6407                              192.21
4     270.00 0.5523                              149.12
                             -40.07

IRR =Start rate+(NPV at start rate / NPV at start rate - NPV at end rate) X Difference between rate.
IRR = 12 + (30.90 / 30.90+40.07) * 4
IRR = 13.74% (rounded off to two decimal places)

Since, the cost of capital is not given in the question, we could not comment whether the project should be accepted or not.
As per IRR rule, a project should be accepted if the IRR is greater than the cost of capital.


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