Question

In: Accounting

Calculator Internal Rate of Return Method The internal rate of return method is used by King...

Calculator

Internal Rate of Return Method
The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $73,600 and annual net cash flows of $10,000 for each of the 10 years of its useful life.
Present Value of an Annuity of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3522.99164.9174.3554.1113.7843.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192
a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places.
b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal.
%

Solutions

Expert Solution

Answer a. Present Value Factor for an Annutiy of $1
At IRR,
PV of Inflows = PV of Outflows
Cash inflows pa*PVAF(x,10) = 73600
10000*PVAF = 73600
PVAF(x,10) = 73600/10000
PVAF(x,10) = 7.360
Therefore, present value factor for an annuity of $1 which can be used in determining the internal rate of return is 7.360
Answer b. Internal Rate of Return
Using the table given above,
Interest Rate at which the annuity for 10 years is 7.360 shall be 6%
Years 6% 10% 12% 15% 20%
1                                       0.9434 0.9091                0.8929      0.8696      0.8333
2                                       0.8900 0.8264                0.7972      0.7561      0.6944
3                                       0.8396 0.7513                0.7118      0.6575      0.5787
4                                       0.7921 0.6830                0.6355      0.5718      0.4823
5                                       0.7473 0.6209                0.5674      0.4972      0.4019
6                                       0.7050 0.5645                0.5066      0.4323      0.3349
7                                       0.6651 0.5132                0.4523      0.3759      0.2791
8                                       0.6274 0.4665                0.4039      0.3269      0.2326
9                                       0.5919 0.4241                0.3606      0.2843      0.1938
10                                       0.5584 0.3855                0.3220      0.2472      0.1615
                                      7.3601 6.1446                5.6502      5.0188      4.1925

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

The internal rate of return method is used by King Bros. Construction Co. in analyzing a...
The internal rate of return method is used by King Bros. Construction Co. in analyzing a capital expenditure proposal that involves an investment of $32,445 and annual net cash flows of $9,000 for each of the five years of its useful life. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037...
Internal Rate of Return Method The internal rate of return method is used by Testerman Construction...
Internal Rate of Return Method The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $75,285 and annual net cash flows of $15,000 for each of the 10 years of its useful life. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106...
Net present value (NPV) method and internal rate of return (IRR) are largely used by firms...
Net present value (NPV) method and internal rate of return (IRR) are largely used by firms to assess financial feasibility of an investment. It is also not uncommon to find that these two methods provide conflicting signals on the viability of a project. Explain how do these two methods differ from payback period and accounting rate of return methods, and discuss how NPV-IRR conflict can be remedied.
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $180,000 $360,000 2 180,000 360,000 3 180,000 360,000 4 180,000 360,000 The wind turbines require an investment of $466,020, while the biofuel equipment requires an investment of $1,027,800. No residual value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $390,000 $740,000 2 390,000 740,000 3 390,000 740,000 4 390,000 740,000 The wind turbines require an investment of $1,184,430, while the biofuel equipment requires an investment of $2,112,700. No residual value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $390,000 $740,000 2 390,000 740,000 3 390,000 740,000 4 390,000 740,000 The wind turbines require an investment of $1,184,430, while the biofuel equipment requires an investment of $2,112,700. No residual value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: Year After Hours Sun Fun 1 $320,000 $290,000 2   320,000   290,000 3   320,000   290,000 4   320,000   290,000 After Hours requires an investment of $913,600, while Sun Fun requires an investment of $880,730. No residual value is expected from either project. Present Value...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Wind Turbines Biofuel Equipment 1 $420,000 $800,000 2 420,000 800,000 3 420,000 800,000 4 420,000 800,000 The wind turbines require an investment of $1,275,540, while the biofuel equipment requires an investment of $2,284,000. No residual value is expected from either...
Describe the modified internal rate of return (MIRR) as a method for deciding the desirability of...
Describe the modified internal rate of return (MIRR) as a method for deciding the desirability of a capital budgeting project. What are MIRR's strengths and weaknesses?
a. What are the redeeming qualities and shortcomings of the internal rate of return (IRR) method...
a. What are the redeeming qualities and shortcomings of the internal rate of return (IRR) method in capital budgeting analysis? explain b.Explain conceptually in detail what the weighted average cost of capital (WACC) is and the role it plays in capital budgeting. c. Explain why the opportunity cost and net working capital (NWC) are included, while the financing costs and sunk costs are NOT in the cash flow analysis.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT