Consider the financial data for a project given in the table below. Initial inve
ID: 1114640 • Letter: C
Question
Consider the financial data for a project given in the table below.
Initial investment
$80,000
Project life
6 years
Salvage value
$9,000
Annual revenue
$30,000
Annual expenses
$9,000
(a) What is i* for this project? (Round to one decimal place.)
(b) If the annual expense increases at a 5% rate over the previous year's expenses, but the annual income is unchanged, what is the new i*? (Round to one decimal place.)
Initial investment
$80,000
Project life
6 years
Salvage value
$9,000
Annual revenue
$30,000
Annual expenses
$9,000
Explanation / Answer
(a)
Net Cash Flow (NCF) ($) = Annual revenue - Annual expense = 30,000 - 9,000 = 21,000
NCF in year 0 = - $80,000
NCF in year 6 = $21,000 + $9,000 (Salvage value) = $30,000
i* for the project's NCF is computed using Excel IRR function, as shown below.
(b) Revised NCF and new i* for the project's revised NCF is computed using Excel IRR function, as shown below.
Year NCF ($) 0 -80,000 1 21,000 2 21,000 3 21,000 4 21,000 5 21,000 6 30,000 IRR = 16.5%Related Questions
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