IRR, investment life, and cash inflows: Oak Enterprises accepts projects earning

Question

IRR, investment life, and cash inflows: Oak Enterprises accepts projects earning more than the firm's 15% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of $10,000 and requires an initial investment of $61,450. (Note: All amounts are after taxes.) A) Determine the IRR of this project. Is it acceptable? B) Assuming that the cash inflows continue to be $10,000 per year, how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 15%)? C) With the given life, initial investment, and cost of capital, what is the minimum annual cash inflow that the firm should accept?

Explanation / Answer

a) IRR using financial calculator = 9.9984%, No this project is not acceptable, since required return 15% > IRR b) for cash flows of 10000 till 19th year, IRR = 15.1597 so 9 more cash flows need to added c) let the minimum cash flow be A so, 61450 = A * (1-1.15^-10)/.15 or A = $12244.04 ... answer

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