Your boss has just presented you with the summary in the accompanying table of p

Question

Your boss has just presented you with the summary in the accompanying table of projected costs and annual receipts for a new product line. He asks you to calculate the IRR for this investment opportunity. What would you present to your boss, and how would you explain the results of your analysis? (It is widely known that the boss likes to see graphs of PW versus interest rate for this type of problem.) The company's MARR is 12% per year End of Year Net Cash Flow $460,000 - 41,300 93,600 + 394,000 606,800 - $205,700 4 The IRR is 0%. (Round to one decimal place.)

Explanation / Answer

Year Project Cash Flows (i) DF@ 12% (ii) PV of Project A ( (i) * (ii) ) DF@ 22% (ii) PV of Project A ( (i) * (ii) ) 0 -460000 1                 (460,000.00) 1 (460,000.00) 1 -41300 0.893                    (36,875.00) 0.820     (33,852.46) 2 93600 0.797                     74,617.35 0.672      62,886.32 3 394000 0.712                   280,441.42 0.551    216,978.51 4 606800 0.636                   385,632.37 0.451    273,908.97 5 -205700 0.567                 (116,719.70) 0.370     (76,108.85) CASH INFLOW                   127,096.43 NPV     (16,187.50) IRR = Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) 12% +127096.43 / (127096.43+16187.5)*10% 20.68%

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