*Question 6.2 (Calculate IR before Tax)

Use excel or similar tools, as well as the set up and calculations you have from Problem 7 to calculate the internal rate of return before tax for investment project B, described in Problem 7.

Fill in the internal rate in % in the field below. it is sufficient to answer with one decimal (eg an interest rate of 0.5467231=54.7%). A deviation of 5% from the answer is accepted.

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Calculation for Problem 7

particular	year	present value factor 5%	amount	present value
cash outflow
initial investment	0	1	200,000	200,000
cost of production	1-20	13.085	910,000	11,907,350
cash inflow
sale	1-20	13.085	1,240,000	16,225,400
NPV				4,118,050

p=3380.018Qp=248k=178Q+20,000

Explanationfor step 1

NPV = Cash inflow - Cash outflow

cost of production = 178*Q+20,000

= 178*5000+20,000

= 910,000

P = 248

P = 338 - 0.018*Q

Q = ( 338 - 248 ) / 0.018 = 5000

Step 2/3

present value factor for the quarter = annual discount rate / 4

= 20 % / 4

= 5%

Explanationfor step 2

discounting factor per quarter is 5%

Step 3/3

total cash inflow

sale = price * quantity demanded

price = 248

quantity demanded = 5000

sale = 248*5000

= 1,240,000

Explanation for step 3

market price is taken as P

Final answer

NPV before tax per quarter is 4,118,050

therefore company should invest in the project