The Balistan Rug Co. is considering investing in a loom that costs $12,000 and will create...
- The Balistan Rug Co. is considering investing in a loom that costs $12,000 and will create positive cash flows of $5000 per year for the next 3 years. The internal rate of return for this project is
- between 10% and 15%. Solve via trial and error to find the IRR that sets NPV=0
- between 15% and 20%
- between 20% and 25%
- between 25% and 30%
Homework Answers
Ans a. between 10% and 15%
| Year | Project Cash Flows (i) | DF@ 10% | DF@ 10% (ii) | PV of Project ( (i) * (ii) ) | DF@ 15% (iii) | PV of Project ( (i) * (iii) ) |
| 0 | -12000 | 1 | 1 | (12,000.00) | 1 | (12,000.00) |
| 1 | 5000 | 1/((1+10%)^1) | 0.909 | 4,545.45 | 0.870 | 4,347.83 |
| 2 | 5000 | 1/((1+10%)^2) | 0.826 | 4,132.23 | 0.756 | 3,780.72 |
| 3 | 5000 | 1/((1+10%)^3) | 0.751 | 3,756.57 | 0.658 | 3,287.58 |
| 12.04% | NPV | 434.26 | NPV | (583.87) | ||
| IRR = | Ra + NPVa / (NPVa - NPVb) * (Rb - Ra) | |||||
| 10% + 434.26 / (434.26 + 583.87)*5% | ||||||
| 12.04% |
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