Question

DO 5.75 PLEASE

5.71 Consider the following cash flow of a certain project: Net Cash Flow n 0 -$2000 1 800 2 900 3 If the project's IRR is 10%, (a) Find the value of X. (b) Is this project acceptable at MARR = 8%? 5.75 Recent technology has made possible a computerized vending machine that . grind coffee beans and brew fresh coffee on demand. The computer also makes can possible such complicated functions as changing $5 and $10 bills, tracking the ag: of an item, and moving the oldest stock to the front of the line, thus cutting dos on spoilage. With a price tag of $4500 for each unit, Easy Snack has estimated te cash flows in millions of dollars over the product's six-year useful life, includine the initial investment, as follows: Net Cash Flow n -$20 10 8 1 17 19 18 5 10 6 3 Short Ca (a) On the basis of the IRR criterion, if the firm's MARR is 18%, is this product worth marketing? (b) If the required investment remains unchanged, but the future cash flows are expected to be 10% higher than the original estimates, how much of an in- crease in IRR do you expect? (c) If the required investment has increased from $20 million to $22 million, but the expected future cash flows are projected to be 10% smaller than the origi- nal estimates, how much of a decrease in IRR do you expect?

Answer 1

Ans A)

Internal rate of return is the rate of return that makes Present Value of Cash Outflow equals to Present value of Cash inflow

Let Internal rate of return (IRR)=r

PV of Cash Outflow=PV of Cash Inflow

20=8/(1+r)+17/(1+r)^2+19/(1+r)^3+18/(1+r)^4+10/(1+r)^5+3/(1+r)^6

Using excel function "IRR (-20,8,17,...,3)"=60.52%

MARR=18%< IRR=60.52% therefore this product is worth marketing

Ans B)

If Future Cash flow to be 10% higher then we have Net Cash flow as follows

8(1.1)=8.8
17(1.1)=18.7
19(1.1)=20.9
18(1.1)=19.8
10(1.1)=11
3(1.1)=3.3

IRR(-20,8.8,18.7,20.9,19.8,11,3.3)=67.02%
then IRR is 67.02%

hence IRR increases by 10.74% from original value found in A) ( Increase in IRR by more than 10%)

Ans C)

Noe Initial cost increases from $20 mn to $22 mn and future cash flow projected to be 10% smaller therefore new schedule is

-22, 7.2, 15.3, 17.1, 16.2, 9, 2.7

IRR(-22, 7.2, 15.3, 17.1, 16.2, 9, 2.7)=48.07%

Hence IRR changes from original value by (48.07%-60.52%)/60.52% "20.58%"

IRR reduces by 20.52% from its original value found in A) (Decrease in IRR by more than 10%)