Billabong Texh uses the internal rate of return to select projects. Calculate th
ID: 2750563 • Letter: B
Question
Billabong Texh uses the internal rate of return to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-shirt requires an initial investment of $11,500 and generates cash inflows of $5,500 per year for 3 years. Project Board Shorts requires an initial investment of $24,167 and produces cash inflows of $14,000 per year for 4 years.- The IRR of project T-shirt is __% (round to two decimal places)
- The IRR of project board shorts is __% (round to two decimal places) Billabong Texh uses the internal rate of return to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-shirt requires an initial investment of $11,500 and generates cash inflows of $5,500 per year for 3 years. Project Board Shorts requires an initial investment of $24,167 and produces cash inflows of $14,000 per year for 4 years.
- The IRR of project T-shirt is __% (round to two decimal places)
- The IRR of project board shorts is __% (round to two decimal places)
- The IRR of project T-shirt is __% (round to two decimal places)
- The IRR of project board shorts is __% (round to two decimal places)
Explanation / Answer
Answer
The IRR of project T-shirt is 20.48 %
The IRR of project board shorts is 33.68 %
Working
Project T-shirt :
IRR is the rate of return where NPV is equal to zero i.e
Present Value of Cash Inflow = Present Value of Cash outflow
Annual Cash Flow *PVIFA(rate,nper) = Initial Investment
5500*PVIFA(rate,3) = 11500
PVIFA(rate,3) = 11500/5500
PVIFA(rate,3) = 2.090909
Using PV table
rate = 20.48%
Alternatively
Present Value of Cash Inflow = Present Value of Cash outflow
5500/(1+r) + 5500/(1+r)^2 + 5500/(1+r)^3 = 11500
using trial run error method
IRR = 20.48%
Project board shorts :
IRR is the rate of return where NPV is equal to zero i.e
Present Value of Cash Inflow = Present Value of Cash outflow
Annual Cash Flow *PVIFA(rate,nper) = Initial Investment
14000*PVIFA(rate,4) = 24167
PVIFA(rate,4) = 24167/14000
PVIFA(rate,4) = 1.726214
Using PV table
rate = 33.68%
Alternatively
Present Value of Cash Inflow = Present Value of Cash outflow
14000/(1+r) + 14000/(1+r)^2 + 14000/(1+r)^3+ 14000/(1+r)^4 = 24167
using trial run error method
IRR = 33.68%
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