29. The Steel Factory is considering a project that will produce cash inflows of

Question

29. The Steel Factory is considering a project that will produce cash inflows of $44,400 a year for five years. What is the internal rate of return if the initial cost of the project is $135,000?

15.45 percent 19.25 percent 11.95 percent 17.65 percent 13.15 percent

15.Chance, Inc. is considering a project with an initial cost of $1.02 million. The project will not produce any cash flows for the first two years. Starting in year 3, the project will produce cash inflows of $663,000 a year for 5 years. This project is risky, so the firm has assigned it a discount rate of 23.9 percent. What is the net present value?

Explanation / Answer

Solution:- 29) Ans:- IRR of prject = 19.25% Claculation of project IRR We have taken 19% and 20% discount factor for hit and trial method. Year cash flow PVF at 19% Present value PVF at 20% Present value A B C D=B*C E F=B*E 1 $44,400.00 0.84033613 $37,310.92 0.833333 $37,000.00 2 $44,400.00 0.70616482 $31,353.72 0.694444 $30,833.33 3 $44,400.00 0.59341581 $26,347.66 0.578704 $25,694.44 4 $44,400.00 0.49866875 $22,140.89 0.482253 $21,412.04 5 $44,400.00 0.41904937 $18,605.79 0.401878 $17,843.36 Total $135,758.99 $132,783.18 We have to use hit and trial method. PV of cash inflow at 19% =$135,758.99 PV of cash inflow at 20%= $132,783.179 The IRR of the project can be calculated as follows:- IRR=Lower DR+ Difference b/w DRs{[PVCF of lower DR-initial investment]/Absolute difference B/w DRs cash flow.} Where, DR stands for discount rate PV stands for present value B/W stands for between. Now substituting values we get = 19%+1%{(135,758.99-135,000)/(135,758.99-132883.179) =19%+0.25% =19.25% 15) Calcualtion of NPV Year cash flow PVF at 23.9% Present value A B C D=B*C 0 -$1,020,000.00 1 -$1,020,000.00 1 $0.00 0.8071025 $0.00 2 $0.00 0.65141445 $0.00 3 $663,000.00 0.52575823 $348,577.71 4 $663,000.00 0.42434078 $281,337.94 5 $663,000.00 0.34248651 $227,068.56 6 $663,000.00 0.27642172 $183,267.60 7 $663,000.00 0.22310066 $147,915.74 NPV $168,167.54 NPV of project = PV of inflows -PV of souflows =$168,167.54 ( as calculated above) Please feel free to ask if you have nay query in the comment section.

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