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In: Accounting

Sammy Corporation is considering two alternative investment proposals with the following data: Proposal A Proposal B...

Sammy Corporation is considering two alternative investment proposals with the following data: Proposal A Proposal B Investment $850,000 $468,000 Useful life 8 years 8 years Estimated annual net cash inflows for 8 years $125,000 $78,000 Residual value $40,000 $ — Depreciation method Straight-line Straight-line Required rate of return 14% 10% Using EXCEL or a financial calculator, determine the internal rate of return for Proposal A? (Ignore taxes) Group of answer choices 2.79% 2.88% 4.57% 14.71%

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Expert Solution

Internal Rate Of Return For Proposal A
Let us calculate NPV using 14% and 20% rate
4% 14%
a Annual Cash Flow $        1,25,000 125000
b PVAF ( 8 years) 6.73274 4.63886
c PV Of Annual Cash flow (a*b) $        8,41,593 $    5,79,858
d Salvage value $            40,000 $       40,000
e PVF 8th year 0.73069 0.35056
f PV Of Salvage Value (d*e) $            29,228 $       14,022
g Initial Investment $        8,50,000 $    8,50,000
h Net Present Value (c+f-g) $            20,821 $ -2,56,120
IRR = 4% + (20821/(20821+256120)*10%
= 4% +0.57%
=4.57%

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