Oak enterprises accepts projects earnings more than the firms 13% cost of capita
ID: 2717225 • Letter: O
Question
Oak enterprises accepts projects earnings more than the firms 13% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of 35,000 and requires an initial investment of $218900(all amounts are after taxes) 1) the projects IRR is ...% 2) is the project acceptable yes or no? 3) assuming that the cash inflows continue to be 35,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 13% discount rate is .... Additional years ( round two decimal places) 4) with the given life, initial investment, and cost of capital, the minimum annual cash inflow that the firm should accept is .... Round to nearest cent Oak enterprises accepts projects earnings more than the firms 13% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of 35,000 and requires an initial investment of $218900(all amounts are after taxes) 1) the projects IRR is ...% 2) is the project acceptable yes or no? 3) assuming that the cash inflows continue to be 35,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 13% discount rate is .... Additional years ( round two decimal places) 4) with the given life, initial investment, and cost of capital, the minimum annual cash inflow that the firm should accept is .... Round to nearest cent 1) the projects IRR is ...% 2) is the project acceptable yes or no? 3) assuming that the cash inflows continue to be 35,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 13% discount rate is .... Additional years ( round two decimal places) 4) with the given life, initial investment, and cost of capital, the minimum annual cash inflow that the firm should accept is .... Round to nearest centExplanation / Answer
1
Calculation of IRR of the project:
At IRR, the NPV of the project should be Zero
Lets calculate IRR using trial and error method
Taking 10% as discount rate :
Annual Cash inflow (A)
35000
Term (Years)
10
Rate (Assumed )
10%
PVF (10%, 10 years) (B)
6.14457
Present value of cash inflow = A*B
$ 215,059.85
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ (3,840.15)
NPV at 10% discount rate is negative
Hence we should take lower discount rate
Taking 9% as discount rate :
Annual Cash inflow (A)
35000
Term (Years)
10
Rate (Assumed )
8%
PVF (9%, 10 years) (B)
6.41766
Present value of cash inflow = A*B
$ 224,618.02
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ 5,718.02
Now we get NPV positive at 9% discount rate
So we can say IRR is in between 9 % and 10%
Now we can calculate exact IRR as under:
NPV
Rate
At 9% discount rate
$ 5,718.02
9%
At 10% discount rate
$ (3,840.15)
10%
Difference
$ 9,558.17
1%
IRR = 9% + 1% * (5718.02 / 9558.17) =
9.60%
2
Project is not acceptable because the IRR (9.60%) is less than minimum required rate (13%)
3
Calculation of Additional years:
Assuming 3 additional years
IRR should be equal to 13% and hence NPV should be zero.
Taking 3 Additional years :
Annual Cash inflow (A)
35000
Term (Years)
13
Rate (Assumed )
13%
PVF (13%, 13 years) (B)
6.12181
Present value of cash inflow = A*B
$ 214,263.40
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ (4,636.60)
NPV at 13 years is negative
Hence we should take one more year
Taking 4 Additional years :
Annual Cash inflow (A)
35000
Term (Years)
14
Rate (Assumed )
13%
PVF (13%, 13 years) (B)
6.30249
Present value of cash inflow = A*B
$ 220,587.08
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ 1,687.08
Now we get NPV positive at 14 years
Now we can calculate exact additional term :
NPV
Years
At 3 additional years
$ (4,636.60)
13
At 4 additional years
$ 1,687.08
14
Difference
$ 6,323.68
1
Additional years = 3 + 1 * (4646.60 / 6323.68)
3.73
Years
4
Calculation of Minimum Annual Cash Flows:
Initial Investment (A)
$ 218,900.00
Term (Years)
10
Cost of Capital / required rate
13%
PVF (13%, 10 years ) (B)
5.42624
Minimum Annual Cash Flows =A/B =
$ 40,340.98
1
Calculation of IRR of the project:
At IRR, the NPV of the project should be Zero
Lets calculate IRR using trial and error method
Taking 10% as discount rate :
Annual Cash inflow (A)
35000
Term (Years)
10
Rate (Assumed )
10%
PVF (10%, 10 years) (B)
6.14457
Present value of cash inflow = A*B
$ 215,059.85
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ (3,840.15)
NPV at 10% discount rate is negative
Hence we should take lower discount rate
Taking 9% as discount rate :
Annual Cash inflow (A)
35000
Term (Years)
10
Rate (Assumed )
8%
PVF (9%, 10 years) (B)
6.41766
Present value of cash inflow = A*B
$ 224,618.02
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ 5,718.02
Now we get NPV positive at 9% discount rate
So we can say IRR is in between 9 % and 10%
Now we can calculate exact IRR as under:
NPV
Rate
At 9% discount rate
$ 5,718.02
9%
At 10% discount rate
$ (3,840.15)
10%
Difference
$ 9,558.17
1%
IRR = 9% + 1% * (5718.02 / 9558.17) =
9.60%
2
Project is not acceptable because the IRR (9.60%) is less than minimum required rate (13%)
3
Calculation of Additional years:
Assuming 3 additional years
IRR should be equal to 13% and hence NPV should be zero.
Taking 3 Additional years :
Annual Cash inflow (A)
35000
Term (Years)
13
Rate (Assumed )
13%
PVF (13%, 13 years) (B)
6.12181
Present value of cash inflow = A*B
$ 214,263.40
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ (4,636.60)
NPV at 13 years is negative
Hence we should take one more year
Taking 4 Additional years :
Annual Cash inflow (A)
35000
Term (Years)
14
Rate (Assumed )
13%
PVF (13%, 13 years) (B)
6.30249
Present value of cash inflow = A*B
$ 220,587.08
Less: Initial Investment
$ (218,900.00)
Net Present value (NPV)
$ 1,687.08
Now we get NPV positive at 14 years
Now we can calculate exact additional term :
NPV
Years
At 3 additional years
$ (4,636.60)
13
At 4 additional years
$ 1,687.08
14
Difference
$ 6,323.68
1
Additional years = 3 + 1 * (4646.60 / 6323.68)
3.73
Years
4
Calculation of Minimum Annual Cash Flows:
Initial Investment (A)
$ 218,900.00
Term (Years)
10
Cost of Capital / required rate
13%
PVF (13%, 10 years ) (B)
5.42624
Minimum Annual Cash Flows =A/B =
$ 40,340.98
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