Oak Enterprises accepts projects earning more than the firm\'s 13% cost of capit

Question

Oak Enterprises accepts projects earning more than the firm's 13% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of $15.000 and requires an initial investment of $92,500. Determine the IRR of this project. Is it acceptable Assuming that the cash inflows continue to be $15,000 per year, how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 13%) With the given ife, initial investment, and cost of capital, what is the minimum annual cash inflow that the firm should accept The project's IRR b Is the project acceptable Yes No Assuming that the cash inflows continue to be S15.000 per year, the number of additional years the flows would have to continue to make the project acceptable at the 13% discount rate additional years.

Explanation / Answer

Answer to 1 (a) Initial Investment =$ 92500 Annual inflow = $ 15000 Discount rate = 13% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cash outlflw -92500 Cash inflow 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 -92500 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 Discount factor @ 13% 1             0.88             0.78             0.69           0.61           0.54           0.48           0.43           0.38           0.33           0.29 Discounted Cash flow        -92,500        13,274        11,747        10,396         9,200         8,141         7,205         6,376         5,642         4,993         4,419 Possitive value of Cash flow          81,394 IRR sqrt(81394/92500)-1 = -6% It has a negative IRR, therefore project should not be accepted Answer to 1 (b) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Cash outlflw -92500 Cash inflow 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 -92500 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 15000 Discount factor @ 13% 1             0.88             0.78             0.69           0.61           0.54           0.48           0.43           0.38           0.33           0.29           0.26           0.23           0.20           0.18 Discounted Cash flow        -92,500        13,274        11,747        10,396         9,200         8,141         7,205         6,376         5,642         4,993         4,419         3,910         3,461         3,062         2,710 Possitive value of Cash flow          94,537 This project will pe acceptable after additional 4 years.

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