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%

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%

ekkarill92 answered 2 years ago

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