Viera Corporation is considering investing in a new facility. The estimated cost

Question

Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual cash inflows of $400,000 and will need new annual cash outflows of $150,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted.
Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual cash inflows of $400,000 and will need new annual cash outflows of $150,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted.
Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual cash inflows of $400,000 and will need new annual cash outflows of $150,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted.
Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual cash inflows of $400,000 and will need new annual cash outflows of $150,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted.

Explanation / Answer

NPV = 0

Annual Cash Flows (1 through 11)= 400,000 - 150,000 = 250,000

Year 12 Cash Flow = 250,000 + 716,000 = 966,000

Suppose Internal Rate is r

so

NPV = 0

NPV = - 2,045,000 + 250,000/(1+r) + 250,000/(1+r)^2 .........+250,000/(1+r)^11 + 966,000/(1+r)^12

2,045,000 = 250,000/(1+r) + 250,000/(1+r)^2 .........+250,000/(1+r)^11 + 966,000/(1+r)^12

Calculating r

we get r = 0.09 = 9 % per annum

so our IRR > Rate of return i.e. 9 % > 7 %

So we sould accept the project

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