Nichols Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IR
R can be less than the cost of capital or negative, in both cases it will be rejected.
Year 0 1 2 3 4 5
Cash flows −$1,250 $325 $325 $325 $325 $325
Year 0 1 2 3 4 5
Cash flows −$1,250 $325 $325 $325 $325 $325
1 answer:
Answer:
9.43%
Explanation:
The computation of the internal rate of return is calculated by using the spreadsheet which is shown in the attachment
The internal rate of return is the return at which the net present value comes to zero i.e.
Net present value = 0
initial investment = Present value of cash flows after taking the discounting factor
After solving the given problem, the internal rate of return is 9.43%
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Answer (A):
Need more data to select the better adviser
<u>Explanation: </u>
Adviser A averaged 19% return on the investment which is more than that of Adviser B who averaged 16% return on investment. However, adviser A has a beta of 1.5 which is also greater than that of Adviser B who has a beta of 1. This means that adviser A made a more riskier investment and hence a higher average return on investment. We need more data to tell which adviser performed better in relation to each other.
Answer (B):
Investment Adviser B
<u>Explanation:</u>
= T-bill rate = 6%
= Market return = 14%
= Market risk premium = 14% - 6% = 8%
= Average Return by Adviser A =19%
= Beta of Adviser A = 1.5
= Average Return by Adviser B =16%
= Beta of Adviser B = 1
CAPM Equation is
<u>For Adviser A</u>
= 6 + 1.5 (14 - 6) = 18%
The expected average return for the investment is 18% which means that Adviser A over performed the market by 1 %
<u>For Adviser B</u>
= 6 + 1 (14 - 6) = 14%
The expected average return for the investment is 14% which means that the Adviser B over performed the market by 2 %
Clearly, Adviser B performed better than Adviser A.
Answer (C):
Adviser B
<u>Explanation:</u>
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In this part, the and
All else remains the same
We make similar calculation as in part B