Question

IRR, investment​ life, and cash inflows Oak Enterprises accepts projects earning more than the​ firm's 11​% cost of capital. Oak is currently considering a 13​-year project that provides annual cash inflows of ​$25,000 and requires an initial investment of ​$222,100. ​ (​Note: All amounts are after​ taxes.)

a. Determine the IRR of this project. Is it​ acceptable?

b. Assuming that the cash inflows continue to be ​$25,000 per​ year, how many additional years would the flows have to continue to make the project acceptable​ (that is, to make it have an IRR of 11​%)?

c. With the given​ life, an initial investment of ​$222,100​, and cost of capital of 11​%, what is the minimum annual cash inflow the investment would have to provide in order for this project to make sense for​ Oak's shareholders?

Answer 1

a). IRR (using IRR() function) is 5.94%. Since it is less than the cost of capital (11%), it is not acceptable.

Year (n)	Cash flow (CF)
0	(2,22,100)
1	25,000
2	25,000
3	25,000
4	25,000
5	25,000
6	25,000
7	25,000
8	25,000
9	25,000
10	25,000
11	25,000
12	25,000
13	25,000
IRR	5.94%

b). PV = -222,100; PMT = 25,000; rate = 11%; FV = 0, CPT NPER.

N = 36.25 years

Additional number of years = 36.25-13 = 23.25 years.

c). PV = -222,100; N = 13; rate = 11%; FV = 0, CPT PMT.

PMT = 32,904.34

Annual cash flows would have to be 32,904.34 for the project to make sense for the shareholders.