Question

daughn corporation is considering investing in a new facility the estimated cost of the facility is 1904630 it will be used for 12 years then sold for 713200 the facility will generate annual cash inflows of 370700 and will need new annual cash outflows of 155600 the company has required rate of return of 7%. calculate the internal rate of return on this project

Answer 1

Annual net cash flow = cash inflow - cash outflow

= 370700 - 155600

= 215100

For calculating IRR ,we will select two discount rates such that one gives present value of net cash flow above initial cost and one below initial cost

At 7% ,Present value =[PVA7%,12*Net cash flow ]+[PVF7%,12*Salvage value]

[7.94269*215100]+ [ .44401*713200]

17,08,413+ 3,16,668

20,25,141

At 3% ,present value = [PVA3%,12*net cash flow ]+[PVF3%,12*Salvage value]

[9.95400*215100]+ [.70138*713200]

21,41,105+ 5,00,224

26,41,330

IRR =lower discount rate +[(PV at LDR-initial cost)(HDR-LDR)/(PV at LDR-PV at HDR)]

= 3 + [(26,41,330-19,04,630)(7-3)/(26,41,330-20,25,141)]

= 3+ [7,36,700*4/616,189]

= 3 + 4.7823

= 7.78% or 8% (Appro)

Since IRR (7.78% or 8% )is greater than cost of capital of 7% ,project should be accepted.