Question
3.3 Internal Rate of returnSuppose that a project required an initial cash investment of $24,000and was expected to generate inflows of $10,000, $10,000, and$10,000 for
3.3 Internal Rate of returnSuppose that a project required an initial cash investment of $24,000and was expected to generate inflows of $10,000, $10,000, and$10,000 for the next three years. Further, assume that our companysrequired rate of return for new projects is 12%. Is this project worthfunding? Is it still a good investment when the companys requiredrate of return is 15%?Cash investment = $24,000Year 1 inflow = $10,000Year 2 inflow = $10,000Year 3 inflow = $10,000Required rate of return = 12%Discount FactorYear Inflows at 10% NPV1 10,000 .909 9,0902 10,000 .826 8,2603 10,000 .751 7,510Present value of inflows 24,860Cash investment 24,000Difference $860Discount FactorYear Inflows at 12% NPV1 10,000 .893 8,9302 10,000 .797 7,9703 10,000 .712 7,120Present value of inflows 24,020Cash investment 24,000Difference $20SOLUTIONStep One: Try 10%.Decision: Present value difference at 12% is $20, which suggeststhat 12% is a close approximation of IRR. This project wouldbe a good investment at 12% but it would not be acceptable if thefirms required rate of return were 15%.Discussion Questions1. If you were to prioritize the criteria for a successf
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