core: 0 of 5 pts 4 of 8 (1 complete) HW Score: 12.5%, 5 of 40 pt 10-15 (similar

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core: 0 of 5 pts 4 of 8 (1 complete) HW Score: 12.5%, 5 of 40 pt 10-15 (similar to) Question Help Internal rate of return Peace of Mind, Inc. (PMI) sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that arise. An analyst working for PMI is considering a warranty for a new line of big-screen TVs. A consumer who purchases the 2-year warranty will pay PMI $204. On average, the repair costs that PMI must cover will average $104 for each for the warranty's 2 years. If PMI has a cost of capital of 5%, should it offer this warranty for sale? The intemal rate of return (IRR) for this project is 1.3%. (Round to two decimal places.) The NPV of this project is $ (Round to two decimal places.) nter your answer in the answer box and then click Check Answer. part Clear All Check Answer

Explanation / Answer

Net present value = present value of cash inflow - present value of cash outflow

Year cash flow pvf@5% amount

0 204 1 204

1 -104 0.952 -99.008

2 -104 0.907 -94.328

Net present value 10.664

I had also computed the irr same irr is coming out

As at 1% npv is -0.88

Irr= lower rate + npv at lower rate/ (npv lower +npv higher) *change in rate

Irr = 1%+ -0.88/(-0.88-10.664) * 4

Irr = 1% +0.30%

Irr=1.30%

As irr is lower than cost of capital therefore project should not be accepted .

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