1. A four-year project costs $125,000 and returns $42,025 at the end of each of
ID: 2722151 • Letter: 1
Question
1. A four-year project costs $125,000 and returns $42,025 at the end of each of the next four years. What is the Internal Rate of Return (IRR) for this project? A: 11.5% B: 12.0% C: 12.5% D: 13.0% E: 13.5%
2. Given the following cash flows with an opportunity cost of 9%,
End of Year
Cash OutFlow
Cash Inflow
Net Cash Flow
0
-($10,000)
$0
-($10,000)
1
-($6,000)
$4,000
-($2,000)
2
$0
$5,000
$5,000
3
$0
$8,000
$8,000
4
-($3,000)
$7,000
$4,000
Question 16 options:What is the safe-rate-reinvestment-rate IRR for this project?
A)
10.6%
B)
11.1%
C)
11.6%
D)
12.1%
12.6%
3. What is the borrowing-rate-reinvestment-rate IRR for this project?
A: 10.6% B: 11.1% C: 11.6% D: 12.1% E: 12.6%
4. What is the adjusted-rate IRR for this project?
A: 10.6% B: 11.1% C: 11.6% D: 12.1% E: 12.6%
End of Year
Cash OutFlow
Cash Inflow
Net Cash Flow
0
-($10,000)
$0
-($10,000)
1
-($6,000)
$4,000
-($2,000)
2
$0
$5,000
$5,000
3
$0
$8,000
$8,000
4
-($3,000)
$7,000
$4,000
Explanation / Answer
1. IRR is that rate at which Present value of cash inflow is equal to present value of cash outflow
42025 / (1+r)^1 + 42025 / (1+r)^2 + 42025 / (1+r)^3 + 42025 / (1+r)^4 = 125000
Solving for r we get that PV of cash inflows equals PV of cash outflows at 13% approx.
Option D is correct.
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