The capital budgeting director of Green Manufacturing is evaluating a laser imaging project with the following characteristics: Cost: $150,000 Expected life: 3 years After-tax cash flows: $60,317 per year Salvage value: $0 If Green Manufacturing’s cost of capital is 11.5 percent, what is the project’s internal rate of return (IRR)? thx. the cost of capital is a bit confusing me.
Using the cash flow of your calculator: CF0=-150,000 CF1=60,317, F1=3 hit IRR=9.9998%~10% The cost of capital is given s that (perhaps) you could make the choice easier without calculating IRR. At the 11.5 cost of capital, the NPV is negative, -3,874.87, so the IRR should be lower than the cost of capital. If only one of the choices is lower than 11.5, than that’s the solution. If 2 choices are lower, than you have to calculate the IRR.
looks like a simple plug and chug in the calculator I got 9.999%, too. the WACC is just there to throw you off.
map1 Wrote: ------------------------------------------------------- > > The cost of capital is given s that (perhaps) you > could make the choice easier without calculating > IRR. At the 11.5 cost of capital, the NPV is > negative, -3,874.87, so the IRR should be lower > than the cost of capital. If only one of the > choices is lower than 11.5, than that’s the > solution. If 2 choices are lower, than you have to > calculate the IRR. map1, thx. quite useful explanation so if IRR> require rate of retrun, NPV>0 if IRR< require rate of return, NPV<0