A company invests AED 110.000 in a project with a lifetime of 35 years The proje

Question

A company invests AED 110.000 in a project with a lifetime of 35 years The project gives an annual income of AED 12,000 The yearly maintenance costs are AED 3,500 and the for the project after 35 years is ABD 20.500 There is a single extra cost at the end of ten years of AED 20 800 for renovation of the project Calculate the Internal Rate ofReturn for the project Use interest rate values of S% and 7% and interpolate the IRR linearly A 20128.2 B No ? 1976.2 D S 49% Calculate the internal rate of return (IRR) If the company's munmunacceptable rate of retuin (MARR) is 6 5% should the company proceed with the project? F 134 744 53 H82042 21

Explanation / Answer

1.

R = 5%

Present value = present value of annual income + present value of the salvage value – initial investment – present value of annual maintenance cost – present value of single renovation cost

Present value = 12000*(1-1/1.05^35)/.05 + 20500/1.05^35 - 110000 - 3500*(1-1/1.05^35)/.05 -20800/1.05^10

Present value = $20127.71 or $20128.2 (option A)

2.

R = 7%

Present value = 12000*(1-1/1.07^35)/.07 + 20500/1.07^35 - 110000 - 3500*(1-1/1.07^35)/.07 -20800/1.07^10

Present value = - $8598.36

3.

With the use of interpolation.

IRR = 5% + (20128.2/(20128.2+8598.36))*(7%-5%)

IRR = 6.4%

4.

Company should not proceed with the project, as IRR is 6.4% that is less than the 6.5% of MARR

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