Question

Apply WACC in IRR. Leeward Sailboats is reviewing the following new boat line: Click on the Icon in order to copy its content into a spreadsheet. Category To T1 T2 Тз -$9,056,995 Investment Net working capital change $697,000 $697,000 $3,203,000 $3,711,000 $4,312,000 Operating cash flow $536,000 Salvage At what adjusted WACCS will the company accept this project? Hint: Find the IRR of the project, and use it as the maximum adjusted WACC for accepting the project What is the IRR of the project? % (Round to two decimal places.)

Answer 1

IRR is the Rate at which PV of Cash inflows are equal to PV of Cash Outflows.

Year	CF	PVF @12%	Disc CF	PVf @13%	Disc CF
0	$ -97,53,995.00	1.0000	$ -97,53,995.00	1.0000	$ -97,53,995.00
1	$ 32,03,000.00	0.8929	$ 28,59,821.43	0.8850	$ 28,34,513.27
2	$ 37,11,000.00	0.7972	$ 29,58,386.48	0.7831	$ 29,06,257.34
3	$ 55,45,000.00	0.7118	$ 39,46,821.47	0.6931	$ 38,42,963.15
NPV			$        11,034.38		$   -1,70,261.23

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in DIsc Rate ] * 1%

= 12% + [ 11034.38 / 181295.62 ] * 1%

= 12% + 0.06%

= 12.06%