A company has the opportunity to take over a redevelopment project in an industr

Question

A company has the opportunity to take over a redevelopment project in an industrial area of a city. An immediate investment is required for $1,500,000, and it must raze the existing buildings over a three-year period and, at the end of the third year, invest another $2000 for new construction. It will collect all revenues and pay all costs for a period of 9 years, at which time the entire project, and properties thereon, will revert to the city. The net cash flows are estimated to be as follows: (MARR = 10%) Make your decision whether to accept the project or not with IRR

Explanation / Answer

Calculate IRR based in the given cash flows and make decision based on the following criteria.

If IRR < MARR, then Do Not acceept the project

Or else accept the project.

Enter the given cash flows in an excel sheet as follows..

Calculate IRR using the formula, IRR =IRR(B1:B10)

IRR calculated as 6%, since IRR is less than MARR (Minimum Acceptable Rate of Return), we will not accept the project.

Year 0 (1,500,000) Year 1         300,000 Year 2         100,000 Year 3           (2,000) Year 4         150,000 Year 5         200,000 Year 6         250,000 Year 7         300,000 Year 8         350,000 Year 9         400,000

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