Question

You need to examine a company and determine how cash flow addresses managerial finance decisions. A company must invest the cash out flows on a project (seen in the table below) and will receive the cash inflow from this project. What would the company's discount rate need to be for this project to be a good decision? Use Excel formulas and Goal Seek to solve for the interest rate as opposed to trial and error

After finishing your calculation, consider what this information might tell you. How could a company use this information to make an investment decision?

Year	1	2	3	4	5	6+
Cash out flow	500,000	25,000	25,000	25,000	25,000	-
Cash Inflow	-	-	-	-	850,000	-
Interest rate

Answer 1

The answer is 10.068%

First, write all the cash outflows as negative and inflows as positive in the excel sheet and then use the formula

"=IRR(select both +ve and -ve cash flows),

you 'll get the discount rate needed.

Year	Cashflows
1	-500000
2	-25000
3	-25000
4	-25000
5	825000	(850000-25000)
	10.068%	IRR(F3:F7)

Here F3:F7 indicates the selection range (i.e from -500000 to 825000)