Question
Problem 1: Internal Rate of Return (IRR) (10 marks) Your firm is considering overhauling its production plant. The finance department in consultation with the engineering
Problem 1: Internal Rate of Return (IRR) (10 marks)
Your firm is considering overhauling its production plant. The finance department in consultation with the engineering department has come up with two proposals, one for a minor overhaul and one for a major overhaul. These two proposals have the following cashflows (in millions of dollars)
Year | Minor overhaul | Major overhaul |
0 | -10 | -50 |
1 | 6 | 25 |
2 | 6 | 25 |
3 | 6 | 25 |
Cost of capital of these projects is 12%. If your firm follows Internal Rate of Return (IRR) in making all investment decisions, which proposal you think your firm should accept? Please show detailed workings/calculations and explanation of your recommendation.
(can show workings using financial calculator?)
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