In: Accounting
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%
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% |