Barron, Inc. is considering a four-year project that has an initial outlay or cost of $90,000. The future cash inflows from its
project are $50,000, $30,000, $30,000, and $30,000 for years 1, 2, 3 and 4, respectively. Darrox uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?a. The IRR is between 12% and 20%b. The IRR is about 28.89%c. The IRR is less than 12%d. The IRR is about 22.80%
1 answer:
Answer:
D. The IRR is about 22.80%
Explanation:
If we use excel instead of trial and error method, it is easy to determine the Internal rate of return. As there is no cost of capital, it is challenging to determine IRR through the trial and error method.
The following image shows the IRR of this project is 22.80%.
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Answer:
the Expected rate of return will be 8.2%
the variance will be 0.001296
Explanation:
We will calculate the Expected Rate of Return which is the sum of the wieghted return based on their probabilities:
return of 0.15 probability 20% = 0.03
return of 0.07 probability 70% = 0.049
return of 0.03 probability 10% = 0.003
expected return = 0.082 = 8.2%
Now to calculate the variance we do:
∑(rk-ERR)^2 x pk
The sum of the difference between the expected rate and the escenario rate, power two, and multiply by their posibility
the variance will be: 0.001296