After graduation from Harvard, you decide to stay in the Cambridge area and star
ID: 2772559 • Letter: A
Question
After graduation from Harvard, you decide to stay in the Cambridge area and start your own business. You think you see a couple of opportunities. Knowing first-hand the pressure Harvard students are under, you consider opening a business that allows them to let off steam and get rid of their aggression: A paintball center right in The Square.The cost of the project would be $150,000, payable up front, while revenues are expected to be $7,500 per year, forever.
If the interest rate on comparable assets is 4%, is this project worthwhile? Show your calculations.
A) What is the project’s internal rate of return (IRR)? Show your calculations.
B) You are also considering a second business opportunity: Supplying fish, fresh from the bottom of the Charles River, to Harvard Dining Services, for the next three years in return for an up-front payment from them of $15,000. You figure it will cost you $5,000 a year in supplies to provide this culinary joy.
So, the revenue and costs of the project can be summarized as follows:
C) Find this project’s internal rate of return (IRR). Show your calculations.
Immediate and only revenue: $15,000 Costs in Year 1: $ 5,000 Costs in Year 2: $ 5,000 Costs in Year 3: $ 5,000Explanation / Answer
A)
Calculation of IRR of the Project :
Initial Investment
$ 150,000
Perpetual Cash inflow per year
$ 7,500
IRR = 700 /150000
5.00%
B)
Calculation of IRR of the Project :
Year
Cash Flows
0
15000
1
-5000
2
-5000
3
-5000
IRR=
0%
A)
Calculation of IRR of the Project :
Initial Investment
$ 150,000
Perpetual Cash inflow per year
$ 7,500
IRR = 700 /150000
5.00%
B)
Calculation of IRR of the Project :
Year
Cash Flows
0
15000
1
-5000
2
-5000
3
-5000
IRR=
0%
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