Frankies,LLC. is thinking about a project that has an initial after-tax outlay o

Question

Frankies,LLC. is thinking about a project that has an initial after-tax outlay  of $150,000. The relevant future cash inflows from its four-year project for years 1 through 4 are: $60,000, $70,000, $75,000 and $70,000. Frankies wants to base their decision using the net present value method and has a discount rate of 12%. Will Frankies accept the project?

Frankies, LLC. is considering a project that has an initial outlay of $150,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $60,000, $70,000, $75,000, and $70,000, respectively. Frankies uses the internal rate of return method to evaluate projects. Will Frankies accept the project if its opportunity cost is 12%?

Explanation / Answer

a.NPV = -150,000 + (60000/1.12) + 70000/1.12^2 + 75000/1.12^3 + 70000/1.12^4

= 57244

so, NPV is positive

so, Frankies will accept the project

b.

IRR-

-150,000 + (60000/(1+IRR)) + 70000/(1+IRR)^2 + 75000/(1+IRR)^3 + 70000/(1+IRR)^4 = 0

=> IRR = 28.54%

as IRR>opportunity cost

so, Frankies will accept the project

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