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Siegmeyer Corp. is considering a new inventory system, Project A will cost $750,000. The system is...
Siegmeyer Corp. is considering a new inventory system, Project A will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. Siegmeyer’s required rate of return is 8%. what is the internal rate of return of this project?
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Expert Solution
Ans 15.13%
| Year | Project Cash Flows (i) | DF@ 10% (ii) | PV of Project A ( (i) * (ii) ) | DF@ 20% (ii) | PV of Project A ( (i) * (ii) ) | |
| 0 | -750000 | 1 | (7,50,000.00) | 1 | (7,50,000.00) | |
| 1 | 350000 | 0.909 | 3,18,181.82 | 0.833 | 2,91,666.67 | |
| 2 | 325000 | 0.826 | 2,68,595.04 | 0.694 | 2,25,694.44 | |
| 3 | 150000 | 0.751 | 1,12,697.22 | 0.579 | 86,805.56 | |
| 4 | 180000 | 0.683 | 1,22,942.42 | 0.482 | 86,805.56 | |
| NPV | 72,416.50 | NPV | (59,027.78) | |||
| IRR = | Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) | |||||
| 10% + 72416.5 / (72416.5 + 59027.89)*10% | ||||||
| 15.13% | ||||||
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