Question

1. Coca Cola is evaluating an investment in a new syrup production machine. The initial investment in the project is $110,000. It has been estimated that annual cash inflows of $40,000 will be generated by the machine for the next 5 years. The opportunity cost of the project is estimated to be 6%. Calculate the Internal Rate of Return (IRR) of the

   project.

   	A.	6%
   	B.	12.7%
   	C.	23.9%
   	D.	19.6%
   	E.	32.8%

Answer 1

IRR is the rate at which PV of cash Inflows are equal to PV of Cash Outflows.

Year	CF	PVF @23%	Disc CF	PVF @24%	Disc CF
0	$ -1,10,000.00	1.0000	$ -1,10,000.00	1.0000	$ -1,10,000.00
1	$      40,000.00	0.8130	$      32,520.33	0.8065	$      32,258.06
2	$      40,000.00	0.6610	$      26,439.29	0.6504	$      26,014.57
3	$      40,000.00	0.5374	$      21,495.36	0.5245	$      20,979.49
4	$      40,000.00	0.4369	$      17,475.90	0.4230	$      16,918.94
5	$      40,000.00	0.3552	$      14,208.05	0.3411	$      13,644.31
NPV			$        2,138.92		$          -184.62

IRR = Rate at which Least +ve NPV + [ NOV at that rate / CHange in NPV due to 1% inc In disc rate ] * 1%

= 23% + [ 2138.92 / 2323.54 ] * 1%

= 23% + 0.9%

= 23.9%

IRR is 23.9%

option C is correct