Quiz: Exam 3 Online C Consider Two Projects With C Consider Two Projects with ??
ID: 2616475 • Letter: Q
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Quiz: Exam 3 Online C Consider Two Projects With C Consider Two Projects with ??1-Home-LookingGlass ? ? fù ?https://nmsu.instructure.com/courses/1156550/quizzes/1883847/take NM m???? 800 STATE O 1100 Question 12 4 pts Consider two mutually exclusive projects with the following cash flows: Project S is a 4 year project with initial (time 0) cash outflow of 3000 and time 1 through 4 cash inflows of 1500, 1200, 800 and 300 respectively. Project L is a 4 year project with initial (time O) cash outflow of 3000 and time 1 through 4 cash inflows of 400, 900, 1300, and 1500 respectively. Assuming a 5% cost of capital, compute the IRR for project S. 955% O 11.38% O 8.77% O 13.11% D Question 13 4 pts 41 PM O Type here to search 6/18/2018 20Explanation / Answer
The Answer is “ 13.11% “
Internal Rate of Return [IRR] of the Project S = 13.11%
Step – 1, Firstly calculate NPV at 12%
Net Present Value [NPV] = Present Value of Annual cash flows – Initial Investment
= [ 1500 x 0.89285] + [ 1200 x 0.797193] + [ 800 x 0.711780] + [ 300 x 0.635518] – 3,000
= $3,056 – 3,000
= $56
Step – 2, NPV at 12% is Positive , Calculate the NPV again at a Higher Rate , Say 14%
= [ 1500 x 0.877192] + [ 1200 x 0.76946] + [ 800 x 0.674971] + [ 300 x 0.5920802] – 3,000
= $2956.75 – 3,000
= - $43.25 [ Negative NPV]
Therefore IRR = R1 + NPV1(R2-R1)
NPV1-NPV2
= 12% + $56 (14% - 12%)
$56 – (-43.25)
IRR = 12% + 1.11% = 13.11%
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