Question

You are thinking of starting an energy drink business that requires an initial investment of $11,000 and a major replacement of equipment after 9 years amounting to $7.000. From competitive experience, you expect to have a net loss of $1,000 the first year, a net profit of $3,000 the second year, and, for the remaining years of the first 14 years of operations, net returns of $5,000 per year. After 14 years, the net returns will gradually decline and will be zero at the end of 23 years (assume returns of $2,000 per year for that period). After 23 years, your lease will expire. The salvage value of equipment at that time is expected to be just sufficient to cover the cost of closing the business Calculate the internal rate of return (IRR). Use technology to solve the problem The internal rate of return is % (Round to the nearest tenth as needed) Enter your answer in the answer box

Answer 1

Solution :-

N8 B с D A 1 Solution :- 2 Year 3 0 4 1 5 2 6 3 7 4 8 5 9 6 10 7 11 8 12 9 13 10 11 14 Cash flows ($11,000) ($1,000) $3,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 ($2,000) $5,000 $5,000 $5,000 $5,000 $5,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $2,000 $0 15 12 13 16 17 14 18 15 19 16 17 20 18 21 22 23 19 24 20 21 22 25 26 23 27 IRR 27.63% 28

N8 foc A B 1 Solution :- 2 Year Cash flows o 3 4 1 -11000 -1000 3000 5000 5 2 6 3 7 4 5000 8 5 9 6 10 7 11 8 12 9 13 10 5000 5000 5000 5000 =5000-7000 5000 5000 5000 5000 5000 2000 2000 14 11 15 12 16 13 17 14 18 15 19 16 20 17 2000 21 18 2000 2000 22 19 23 20 24 21 2000 2000 2000 25 22 26 23 27 0 =IRR(B3:326) IRR

Therefore Internal Rate of Return = 27.63%

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