A company has the opportunity to take over a redevelopment project in an industr

Question

A company has the opportunity to take over a redevelopment project in an industrial area of a city. No immediate investment is required, but it must raze the existing buildings over a four-year period and, at the end of the fourth year, invest $2,300,000 for new construction. It will collect all revenues and pay all costs for a period of 10 years, at which time the entire project, and properties thereon, will revert to the city. The net cash flows are estimated to be as shown on the right. Tabulate the PW versus the interest rate and determine whether multiple IRRs exist. If so, use the ERR method when ??6% per year to determine a rate of return Year End Net Cash Flow $540,000 300,000 80,000 -2,300,000 130,000 180,000 230,000 280,000 330,000 4 Click the icon to view the interest and annuity table for discrete compounding when the MARR is 6% per year There is/are two IRR value(s) for the given net cash-flow sequence The first IRR value is | %. (Round to one decimal place.)

Explanation / Answer

The first IRR value = 7.6%
and second IRR value = 31.2%

(PV of expenses discounnted at 6%) * (1+r)10 = (FV of revenues at 6%)
r = (FV/PV)(1/10) -1 = 6.18%

A B C D E F Year Net Cash flow Interest rate Present Worth Formula = NPV(C1,B1:10) IRR = IRR( B1:B10,F1:F8) Guess values 1 1 510,000 1% $221,344.87 7.6% 5% 2 2 270,000 2% $170,861.98 7.6% 10% 3 3 90,000 3% $127,572.79 7.6% 15% 4 4 -2,390,000 4% $90,615.85 31.2% 20% 5 5 150,000 5% $59,232.26 31.2% 25% 6 6 210,000 6% $32,752.99 31.2% 30% 7 7 270,000 7% $10,587.79 31.2% 35% 8 8 330,000 8% ($7,784.34) 31.2% 40% 9 9 390,000 9% ($22,823.57) 31.2% 45% 10 10 450,000 10% ($34,936.56)

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