Question

11.8 Apply WACC in IRR.

Leeward Sailboats is reviewing the following new boat​ line:

Category	T0		T1	T2	T3
Investment	−​$8,776,830
Net working capital change	−​$631,000				​$631,000
Operating cash flow			​$2,789,000	​$3,280,000	​$4,145,000
Salvage					​$672,000

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.

1. What is the IRR of the​ project?
2. At what adjusted WACCs will the company accept this​ project?  

Answer 1

72 Method One Method Two Year Discounted Discounted Cash Flows PVF@10% Cash Flows PVF@9% Cash flows Cash flows 0 -$94,07,830.00 1.0000 -$94,07,830.00-$94,07,830.00 1.0000 -$94,07,830.00 1 $27,89,000.00 0.9091 $25,35,479.90 $27,89,000.00 0.9174 $25,58,628.60 2 $32,80,000.00 0.8264 $27,10,592.00 $32,80,000.00 0.8417 $27,60,776.00 3 $54,48,000.00 0.7513 $40,93,082.40 $54,48,000.00 0.7722 $42,06,945.60 NET PRESENT VALUE $68,675.70 $1,18,520.20 At, IRR NPV shuld be Zero; NPV at 10% is - $68,675.70 NPV at 9% is $118,520.20 Means, for 1% incrase from 9%, NPV increases by $187,195.90 So, at what percentage NPV will increase by $68,675.70 = $68,675.70/$187195.90 = 0.37% Therefore, IRR is 9.37% (9%+0.37%)