Chandler Chairs is considering an equipment investment that will cost $945,000.
ID: 2437301 • Letter: C
Question
Chandler Chairs is considering an equipment investment that will cost $945,000.
Projected net cash inflows over the? equipment's three-year life are as? follows: Year? 1:$490,000?;
Year? 2: $402,000?; and Year? 3: $282,000. Chandler wants to know the? equipment's IRR.
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?(Click the icon to view the present value annuity? table.)
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?(Click the icon to view the present value factor? table.)
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?(Click the icon to view the future value annuity? table.)
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?(Click the icon to view the future value factor? table.)
Requirement
Use trial and error to find the IRR within a? 2% range.
?(Hint?:
Use Chandler?'s hurdle rate of 10?% to begin the? trial-and-error process.) Use a business calculator or spreadsheet to compute the exact IRR. Begin by calculating the NPV at three? rates:
10?%,
12?%,
and
1414?%.
?
Begin by calculating the NPV at three? rates: 10?%, 12?%, and 14?%. ?(Round your answers to the nearest whole dollar. Use parentheses or a minus sign for negative net present? values.)
Explanation / Answer
Solution:
As NPV is positive at discount factor 12% and NPV is negative at discount factor 14% therefore IRR falls between 12% to 14%.
IRR = 12% + (NPV at 12% - NPV at IRR) / (NPV at 12% - NPV at 14%)*2
= 12% + ($13694 - 0) / ($13,694 + $15,508)*2 = 12.94%
Computation of NPV Particulars Period Amount Discount rate - 10% Discount rate - 12% Discount rate - 14% PV factor Present Value PV factor Present Value PV factor Present Value Cash outflows: Initial Investment 0 $945,000 1 $945,000 1 $945,000 1 $945,000 Present Value of Cash outflows (A) $945,000 $945,000 $945,000 Cash Inflows Annual Cash Inflows: Year 1 1 $490,000 0.90909 $445,455 0.89286 $437,500 0.87719 $429,825 Year 2 2 $402,000 0.82645 $332,231 0.79719 $320,472 0.76947 $309,326 Year 3 3 $282,000 0.75131 $211,871 0.71178 $200,722 0.67497 $190,342 Present Value of Cash Inflows (B) $989,557 $958,694 $929,492 Net Present Value (NPV) (B-A) $44,557 $13,694 -$15,508Related Questions
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