APPLY THE CONCEPTS: Internal rate of return Calculate the internal rate of retur

Question

APPLY THE CONCEPTS: Internal rate of return

Calculate the internal rate of return for Project A and Project B (defined previously).

Enter the IRR with the percent sign (i.e. 4%).

Project A: IRR Analysis With an initial investment of $173,250 and annual cash flows of $______ , the internal rate of return for Project A is_______ .

Project B: IRR Analysis With an intial investment of $63,400 and annual cash flows of $______ , the internal rate of return for Project B is_______

Project A
This project requires an initial investment of $173,250. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000 and expenses associated with the project will be $40,000 for an annual net cash flow of $______.

Project B
This project requires an initial investment of $63,400. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000, and expenses associated with the project will be $70,000, for an annual net cash flow of $._____ .

Explanation / Answer

Calculation of Internal Rate of Return Project A 10% Year Cash Flow Discount Net Flow 0 -173250 1 -173250 1 50000 (90000-40000) 0.909091 45454.55 2 50000 0.826446 41322.31 3 50000 0.751315 37565.74 4 50000 0.683013 34150.67 NPV -14756.7 5% Year Cash Flow Discount Net Flow 0 -173250 1 -173250 1 50000 (90000-40000) 0.952381 47619.05 2 50000 0.907029 45351.47 3 50000 0.863838 43191.88 4 50000 0.822702 41135.12 NPV 4047.525 IRR = LR+NPV at Lower Rate/ NPV at lower rate+NPV at higher Rate ( HR-LR) = 5+4047.53/4047.53+14756.7 ( 10-5) = 5+1.08 IRR 6.08% Calculation of Internal Rate of Return Project B 10% Year Cash Flow Discount Net Flow 0 -63400 1 -63400 1 20000 (90000-70000) 0.909091 18181.82 2 20000 0.826446 16528.93 3 20000 0.751315 15026.3 4 20000 0.683013 13660.27 NPV -2.69107 5% Year Cash Flow Discount Net Flow 0 -63400 1 -63400 1 20000 (90000-70000) 0.952381 19047.62 2 20000 0.907029 18140.59 3 20000 0.863838 17276.75 4 20000 0.822702 16454.05 NPV 7519.01 IRR = LR+NPV at Lower Rate/ NPV at lower rate+NPV at higher Rate ( HR-LR) = 5+7520/7520+2.70 ( 10-5) = 5+1.08 IRR 5+4.99% IRR 9.99%

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