Brief Exercise 12-8 Viera Corporation is considering investing in a new facility

Question

Brief Exercise 12-8

Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $1,564,297. It will be used for 12 years, then sold for $714,000. The facility will generate annual cash inflows of $351,200 and will need new annual cash outflows of $155,100. The company has a required rate of return of 7%. Click here to view PV table.

Calculate the internal rate of return on this project. (Round answer to 0 decimal place, e.g. 125.)

Whether the project should be accepted.

Explanation / Answer

Internal rate of return on this project = 10%

Workings

Net Cash Inflow = $351200 - $155100 = $196100

Salvage Value = $714000

Initial Investment = $ 1,564,297

NPV at 7% = [ $351200 x 7.94267 ] + [$714000 x 0.44401] - $ 1,564,297 = $310,284

NPV at 7% = + $310284

Determine the NPV at Higher rate, Say 12%

NPV at 11% = - $ (87,055)

NPV at 11% = [ $351200 x 6.49236 ]+[$714000 x 0.28584] - $ 1,564,297= - $ (87,055)

Therefore IRR =       R1 + NPV1(R2-R1)

NPV1-NPV2

                                    = 7% + $310284 x (11% - 7%)

                                                   $310284 + 87055

            IRR = 10% (Rounded)

The Project should be Accepted, Since the Internal Rate of Return of 10% is greater than the required rate of return of 7%

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