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The document discusses the internal rate of return (IRR) calculations for three different investment scenarios involving equipment purchases and their respective cash flows. It includes calculations for determining whether the investments should be undertaken based on the IRR compared to the cost of capital. The results indicate that one project should not be undertaken as its IRR is below the cost of capital, while the others are evaluated similarly.

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Erica Rivera
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9 views

Answers

The document discusses the internal rate of return (IRR) calculations for three different investment scenarios involving equipment purchases and their respective cash flows. It includes calculations for determining whether the investments should be undertaken based on the IRR compared to the cost of capital. The results indicate that one project should not be undertaken as its IRR is below the cost of capital, while the others are evaluated similarly.

Uploaded by

Erica Rivera
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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11

Internal rate of return (LO12-4) You buy a new piece of equipment for $16,230, and you receive a cash inflo

12
Internal rate of return (LO12-4) King’s Department Store is contemplating the purch
per year in cash flow for nine years. King’s has a cost of capital of 10 percent. Using the
should be undertaken

Internal rate of return (LO12-4) Home Security Systems is analyzing the purchase o
the next three years will be
13

Year Cash Flow


1 $25,000
2 23,000
3 18,000
a. Determine the internal rate of return.
b. With a cost of capital of 18 percent, should the machine be purc

Answers:

11 Payback approach = P16,230/2500 = 6.492


Using the PV annuity table, locate the 6.492 for 12 years.
It is at 11%

12 Payback approach = P22,802/3,500 = 6.515


Using the PV annuity table, locate the 6.515 for 9 years.
It is at 7%
It shold not be undertaken since 7%<10%

13 Add all cash flows divided by number of years


=(25,000 + 23,000 + 18,000)/ 3 22,000.00

Payback approach = P50,000/22,000 2.273


Using the PV Annuity table, locate the 2.273 for 3 years

15% = 2.283
16% = 2.246
17% = 2.210
Since the cash inflows are uneven, we need to compute using the PV single sum approach

Approximation method

at 15%

Year Cash inflows PVFactor PV inflows


1 25,000.00 0.870 21,750.000
2 23,000.00 0.756 17,388.000
3 18,000.00 0.658 11,844.000
Total PV inflows 50,982.000 over to P50,000

at 16%

Year Cash inflows PVFactor PV inflows


1 25,000.00 0.862 21,550.000
2 23,000.00 0.743 17,089.000
3 18,000.00 0.641 11,538.000
Total PV inflows 50,177.000 over to P50,000

at 17%

Year Cash inflows PVFactor PV inflows


1 25,000.00 0.855 21,375.000
2 23,000.00 0.731 16,813.000
3 18,000.00 0.624 11,232.000
Total PV inflows 49,420.000 short to P50,000

Interpolation approach

16% 50,177.00 177.00 (50,177 - 50,000)

Investment 50,000.00

17% 49,420.00 580.00 (50,000 - 49,420)


757.00

Using 16% = 16% + (177/757) 16.234 percent

Using 17% = 17% - (580/757) 16.234 percent

at 16.234% approximated

Year Cash inflows PVFactor PV inflows


1 25,000.00 0.860 21,508.337
2 23,000.00 0.740 17,023.994
3 18,000.00 0.637 11,462.331
Total PV inflows 49,994.662

It shold not be undertaken since 16.234%<18%


d you receive a cash inflow of $2,500 per year for 12 years. What is the internal rate of return?

emplating the purchase of a new machine at a cost of $22,802. The machine will provide $3,500
0 percent. Using the internal rate of return method, evaluate this project and indicate whether it

yzing the purchase of manufacturing equipment that will cost $50,000. The annual cash inflows for

the machine be purchased?


provide $3,500
cate whether it

l cash inflows for

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