for e.) how does he get IRR, why does he use 18 and 20 percent? Problem4: A comp
ID: 1113001 • Letter: F
Question
for e.) how does he get IRR, why does he use 18 and 20 percent?
Problem4: A company is considering investing in a Project to produce a new product. I t will have to invest $310,000 for land, $580,000.00 for buildings, $255,000.00 for equipment and S110,000 for working capital at the beginning of year 1. It is expected that the project will result in annual years, the land can be sold for S340,000.00, the buildings for $350,000.00, and the equipment for $50,000.00. The annual expenses for labor, materials, and all other items are estimated to total $480,000.00 starting at the end of year I. If the prevailing interest rates are 10%, a) Draw the cash flow of this project b) What is the present value of the project? Is the project a good investment? c) What is the Annual, AW, of this project? d) How much would annual revenues have to become, to make the project have zero Present Value? e) What is the IRR of the project assuming the same above salvage values at year 10, expenses and annual revenues of $750,000 per year for 10 years, starting at the end of year 1?Explanation / Answer
18% and 20% are used by hit and trial method.
We try to take a lower rate at which present worth will be positive and a higher rate at which present worth is negative.
Since at IRR present worth is zero, the IRR should lie somewhere between lower rate and higher rate. These lower rate and higher rate should be taken as close as possible.
After calculating PW at lower rate and higher rate, we use formula
(higher rate-lower rate)/(PW at higher rate-PW at lower rate) = (IRR-lower rate)/(0-PW at lower rate)
This formula has been derived by assuming that the PW is a straight line with intereset rate having negative slope.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.