a)Compute the Internal Rate of Return (IRR) of the prospective project: Estimated cash flows are $18,200...

a)Compute the Internal Rate of Return (IRR) of the prospective project: Estimated cash flows are $18,200 at the end of every year for 6 years. Cost today is $67,000.

b) Should the company accept the project if the company's cost of capital is 7%, and why or why not?

Please show all work using the TI BAII Plus Calculator like the example below:

Make sure that 2nd I/Y which is P/Y is set to 1.0.
Make sure that 2nd PMT which is BGN is set to END (not BGN).

10 N
7 I/Y
50 PMT
1000 FV
Cpt PV
$859.53 is today’s value of the bond.

Solutions

Expert Solution

Hello,
AS per the details given in the question
a) Calculation of IRR
Enter the Stroke in the Financial calculator
2nd CF then 2nd CE/C - Erase all the previous data in the calculator
Now enter-
CF0= -67000, enter, arrow down
CF1 = 18200, enter, double arrow down
CF2= 18200, enter, double arrow down
CF3= 18200, enter, double arrow down
CF4 = 18200, enter, double arrow down
CF5 = 18200, enter, double arrow down
CF6 = 18200, enter,
IRR - CPT = 16.03504%

IRR = 16.035%

b)
CF0= -67000, enter, arrow down
CF1 = 18200, enter, double arrow down
CF2= 18200, enter, double arrow down
CF3= 18200, enter, double arrow down
CF4 = 18200, enter, double arrow down
CF5 = 18200, enter, double arrow down
CF6 = 18200, enter,
NPV - I =7% enter arrow down
CPT - NPV = 19751.021

The company should accept the project because company has a positive NPV

I hope this clear your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

Do give a thumbs up if you find this helpful.

jeff jeffy answered 10 months ago

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