Hosier and Wogan (H&W) is a partnership that owns a small company. It is conside
ID: 2499054 • Letter: H
Question
Hosier and Wogan (H&W) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a three-year useful life, will cost $10,267.84, and will generate expected cash inflows of $3,700 per year. The second investment is expected to have a useful life of four years, will cost $8,200.84, and will generate expected cash inflows of $2,700 per year. Assume that H&W has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Required
a.
Calculate the internal rate of return of each investment opportunity.
Explanation / Answer
First Investment Details Year 0 Year 1 Year 2 Year 3 Cash Flows (10,267.84) 3,700.00 3,700.00 3,700.00 Discount Factor @4.0% 1 0.9615 0.9246 0.8890 PV of cash Flows (10,268) 3,558 3,421 3,289 NPV (0) So IRR is 4.0% for 1st option Second Investment Details Year 0 Year 1 Year 2 Year 3 Year 4 Cash Flows (8,200.84) 2,700.00 2,700.00 2,700.00 2,700.00 Discount Factor @12% 1 0.8929 0.7972 0.7118 0.6355 PV of cash Flows (8,200.84) 2,410.71 2,152.42 1,921.81 1,715.90 NPV 0.00 So IRR is 12% for 2nd option
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