1. Compute the IRR static for Project E. The appropriate cost of capital is 8 pe
ID: 2762710 • Letter: 1
Question
1. Compute the IRR static for Project E. The appropriate cost of capital is 8 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
2. Compute the PI static for Project Z if the appropriate cost of capital is 8 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
1. Compute the IRR static for Project E. The appropriate cost of capital is 8 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Explanation / Answer
1. Computation of IRR where cost of capital, i = 8%
0 = -$1,000/(1+IRR)0 + $350/(1+IRR)1 + $480/(1+IRR)2 + $520/(1+IRR)3 + $300/(1+IRR)4 + $100/(1+IRR)5
by hit and trial method,
assuming IRR as 25% we get PV as $1,009.10, and
assuming IRR as 26% we get PV as $990.64
By Interpolating,
IRR - 25% = $1,000 - $1,009.10
26% - 25% $990.64 - $1,009.10
Computing, we get IRR = 25.49%
Since, IRR > Cost of capital i.e., i, the project should be accepted.
2. Calculation of PI static for Project Z if i = 8%
PI = Present Value of future cash flows
Initial Investment
Present Value of cash flows = $350/(1.08)1 + $480/(1.08)2 + $650/(1.08)3 + $300/(1.08)4 + $100/(1.08)5
= $1,540.16
PI = $1,540.16 / $ 1,000 = 1.54016
Since PI > 1, the project should be accepted.
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