A. A project has an initial cost of $57,200 and is expected to produce cash infl

Question

A.

A project has an initial cost of $57,200 and is expected to produce cash inflows of $19,800, $27,900, and $45,200 over the next 3 years, respectively. What is the project’s internal rate of return?

18.92 percent

26.25 percent

16.86 percent

24.63 percent

B.

You are comparing two mutually exclusive projects. Both projects have an initial cost of $40,000 . Project A has cash inflows of $21,000 , $18,000 , and $15,000 over the next 3 years, respectively. Project B has cash inflows of $10,000 , $12,000 and $36,000 over the next 3 years. What is the crossover rate for Projects A and B?

15.03 percent

13.56 percent

14.27 percent

15.29 percent

A project has an initial cost of $57,200 and is expected to produce cash inflows of $19,800, $27,900, and $45,200 over the next 3 years, respectively. What is the project’s internal rate of return?

Explanation / Answer

A. Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

57,200= 19,800/(1.0x) +27,900/ (1.0x)^2 +45,200/(1.0x)^3+

Or x= 24.63 %

Hence the correct answer is 24.63 percent

---------

Initial Cash Investment = $40,000 - $ 40,000

= 0

Year 1 Cash Flow = $(10,000 - 21,000)

= - $ 11,000

Year 2 Cash Flow = $12,000 - $ 18,000

= - $ 6,000

Year 3 Cash Flow = $(36,000 - 15,000)

= $ 21,000

Based on the above calculations, IRR =

0 = - 11,000 / (1.0x)- 6,000 /(1.0x)^2 + 21,000/ (1.0x)^3

or x= 13.563%

= 13.56%

Hence the correct answer is 13.56 pecent

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