Question

10. Two investments have the same expected returns: Year BTCF1 BTCF2 1 $5,000 $2,000 2 10,000 $4,000 3 12,000 $1,000 4 15,000 $5,000 Sale $120,000 $180,000 Investment 1 requires an out lay of $110,000 and investment 2 requires an outlay of $120,000. a. What is the before tax IRR on each investment? b. If the before tax IRR were partitioned based on the cash flow from operations and the cash flow from the sale, what would be the before tax IRR for each? c. What do the partitions above mean?

Answer 1

BTCF1 Combine with CF Operation + Sales Only CF operation Only CF Cash flow 3 Initial outlay -1,10,000 -1,10,000 -1,10,000 4 Year 1 5,000 5,000 5 Year 2 10,000 10,000 6 Year 3 12,000 12,000 7 Year 4 1,35,000 15,000 1,20,000 8 IRR 11.09% -27.15% 2.20% 9 IRR Formula EIRR(B2:B6) =IRR(C2:06) EIRR(D2:06) 10 Initial outlay Year 1 Year 2 Year 3 Year 4 IRR BTCF2 Combine with CF Operation + Sales Only CF operation Only CF Cash flow -1,20,000 -1,20,000 -1,20,000 2,000 2,000 4,000 4,000 1,000 1,000 1,85,000 5,000 1,80,000 12.77% -51.47% 10.67% =IRR(G2:66) =IRR(H2:H6) =IRR(12:16)

The above partition means that cash flow from operation are contributing lesser portion towards present value compared to cash flow from sales.