a. Answer: Internal rate of return (IRR) is the loan cost at which the net prese
ID: 372839 • Letter: A
Question
a.
Answer:
Internal rate of return (IRR) is the loan cost at which the net present estimation of all the money streams (both positive and negative) from a venture or speculation square with zero. Inward rate of return is utilized to assess the allure of a task or venture.
= - $300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431)2 + ($150,000)/(1+.2431)3 + $10,000/(1+.2431)4
The venture's IRR is 24.31%, which is the rate that makes the present estimation of the speculation's money streams equivalent to zero. From a simply monetary viewpoint, Burgundy Basins should buy the gear since this produces a 24.31% return for the Company - significantly higher than the 10% return accessible from different speculations.
Explanation / Answer
8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstandinig Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt Book value of equity Cost of equity capital Tax rate 20 million $40.00 75% $320 million 4.8% $290 million $500 million 14% 3596 Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual ATCF of $6.4 million in perpetuity. a. What is the internal rate of return on the investment? b. What is Burgundy's weighted-average cost of capital? c. If undertaken, would you expect this investment to benefit share- holders? Why or why not?
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