Question
Internal Rate of Return Introduced The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital
Internal Rate of Return Introduced
The internal rate of return (IRR) method uses present value concepts to compute the rate of return from a capital investment proposal based on its expected net cash flows. This method, sometimes called the time-adjusted rate of return method, starts with the proposal's net cash flows and works backward to estimate the proposal's expected rate of return.
Internal Rate of Return Calculation (Even Cashflows)
| IRR Factor = | Investment |
| Annual cash flows | |
If a project has a 6-year life, requires an initial investment of $174,200, and is expected to yield annual cash flows of $40,000, what is the internal rate of return?
| IRR Factor = | $------- | = select ans: 4.355, 4.111, 4.486 |
| $------- |
The calculated value corresponds to which percentage in the table for the present value of ordinary annuities? (Present Value of an Annuity of $1 at Compound Interest.) Select: 10%, 12%, 9%
APPLY THE CONCEPTS: Net present value
Project A This project requires an initial investment of $139,590. The project will have a life of 4 years. Annual revenues associated with the project will be $90,000 and expenses associated with the project will be $45,000 for an annual net cash flow of $--------------.
Note: Enter cash flows as positive numbers.
| Cash Flows | ||
| Year 0 | -$139,590 | |
| Year 1 | ---------- | |
| Year 2 | --------- | |
| Year 3 | -------- | |
| Year 4 | --------- | |
Project B This project requires an initial investment of $129,600. The project will have a life of 4 years. Annual revenues associated with the project will be $100,000, and expenses associated with the project will be $60,000, for an annual net cash flow of $ --------------.
| Cash Flows | ||
| Year 0 | -$129,600 | |
| Year 1 | ------------ | |
| Year 2 | --------- | |
| Year 3 | -------- | |
| Year 4 | -------- | |
The cost of capital for the company is 6%.
Present Value Tables Present Value of $1 (a single sum) at Compound Interest. Present Value of an Annuity of $1 at Compound Interest.
Use the minus sign to indicate a negative NPV. If an amount is zero, enter"0".
| Project A NPV Analysis | |||||||||
| Year | Cash Flow | Discount Factor | Present Value | ||||||
| 0 | $139,590 | 1.000 | $139,590 | ||||||
| 14 | 45,000 | select: 3.465, 0.792, 3.24 | ------------- | ||||||
| NPV | $ ---------- | ||||||||
| Project B NPV Analysis | |||||||||
| Year | Cash Flow | Discount Factor | Present Value | ||||||
| 0 | $129,600 | 1.000 | $129,600 | ||||||
| 14 | 40,000 | select 3.465, 0.792, 3.24 | ------------ | ||||||
| NPV | $--------- | ||||||||
Based upon net present value, which project has the more favorable profit prospects? select Project A , Project B , Either project
APPLY THE CONCEPTS: Internal rate of return
Calculate the internal rate of return for Project A and Project B (defined previously). Enter the IRR with the percent sign (i.e. 4%).
Project A: IRR Analysis
With an initial investment of $139,590 and annual cash flows of $-----------, the internal rate of return for Project A is ------------.
Project B: IRR Analysis
With an intial investment of $129,600 and annual cash flows of $-----------, the internal rate of return for Project B is -------------.
P.S: Please answer correctly all the parts of the question and in the same format so It is easy for me to understand as well, Thank you & your help is much appreciated..
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