A company is considering a 3 year project that has the following cash flows: Yea

Question

A company is considering a 3 year project that has the following cash flows: Year 0 Year 1 Year 2 Year 3 $30K +$123K -$167.4K $75.6K The expected MARR is 15% and the finance interest rate is 10% 3 Points a) Do these cash flows result in a unique IRR? b) If not, what multiple values of IRR do you expect? [5 Points] c) Would you select the highest one as the correct rate of return? d) Compute the return on invested capital (RIC) for this project. e) Would you recommend that the company undertake this project?[2 Points 2 Points [8 Points]

Explanation / Answer

a. The cash flows do not result in a Unique IRR

b. Based on trial and error we get IRR in the range of -100% to -135% (based on trial and error)

c. No, we would not select the highest one as all are negative in value

d. Invested Capital = 273,000 and Inflow = 123,000

ROIC = (123,000-273,000)/273,000 = -0.5495 = -54.95%

e. No. Since investment is much higher than cash inflows

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