Your division is considering two investment projects, each of which requires an

Question

Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following net cash flows:

Year                   projectA                            projectB

1                        $5,000,000                         $20,000,000

2                         10,000,000                         10,000,000

3                         20,000,000                           6,000,000

What are the two projects IRR's if the cost of capital is 5%, 10%, and 15%?

Explanation / Answer

CF0 = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3

$15,000,000 = $5,000,000/(1+r)^1 + 10,000,000/(1+r)^2 + $20,000,000/(1+r)^3

IRR = 44%

$15,000,000 = $20,000,000/(1+r)^1 + 10,000,000/(1+r)^2 + $6,000,000/(1+r)^3

IRR = 82%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.