Question

Check my work Velma and Keota (V&K is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a four year useful te will cost $10,899.69, and will generate expected cash inflows of $3,000 per year. The second investment is expected to have a useful le of five years, wil cost $14058.63, and wil generate expected cash intows of $3.900 per yeat Assume that VK has the funds available to accept only one of the opportunities of S1 and PVA of S1) Use appropriate factors from the tables provided.) Required a. Calculate the internal rate of return of each investment opportunity. Do not found intermediate calculations.) b. Based on the internal rates of return, which opportunity should VK select? Intemal Rate of Return

Answer 1

		Internal Rate of Return
a.	First Investment	4	%
	Second Investment	12	%
b.	V&K should select the	Second Investment

Calculated as

First investment

Cost of Investment = $10889.69

Life = 4 yrs

Annual inflow = $3000

PV factor = $10889.69/3000 = 3.62990

The present value factor of 3.62990 lies against 4% for 4 years of life

Hence Internal rate of return = 4%

Second investment

Cost of Investment = $14058.63

Life = 5 yrs

Annual inflow = $3900

PV factor = $14058.63/3900 = 3.60478

The present value factor of 3.60478 lies against 12% for 5 years of life

Hence Internal rate of return = 12%

V&K should choose second investment as it provides higher Internal rate of return = 12%

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