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Inessa05 [86]
3 years ago
10

An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If

the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? Select one: Yes; The IRR exceeds the required return. Yes; The IRR is less than the required return. No; The IRR is less than the required return. No; The IRR exceeds the required return. You should not apply the IRR rule in this case.
Business
1 answer:
Radda [10]3 years ago
8 0

Answer:

No; The IRR is less than the required return.

Explanation:

Calculation  of IRR is given by the formula: Lr x NPVL / NPVL - NPVH x (Hr - Lr)

where

Lr  = Lower rate of discount

Hr = Higher rate of discount

NPVH = NPV at Higher discount rate

NPVL = NPV at Lower discount rate

Assume a low discount rate of 1% and a high rate of 20%

<u>NPV at 1%</u>

<u>Particulars        Year 0  Year 1    Year 2   Year 3</u>

Cash flows       152,000  71,800  86,900  (11,200)

DCF 1%                 1           0.99    0.98       0.97

Present values (152,000) 71,082 85,162   (10,864)

NPV = $6,620

<u />

<u>NPV at 20%</u>

<u>Particulars        Year 0  Year 1    Year 2   Year 3</u>

Cash flows       152,000  71,800  86,900  (11,200)

DCF 20%                 1           0.83    0.69       0.58

Present values (152,000) 59,594 59,961   (6,496)

NPV = ($38,941)

Substituting values in the IRR formula we have:

1% x [($6,620 / ($6620 - (38,941))] x (20% - 1%) = 2.06%

Therefore we reject the project because it gives an IRR lower than the required rate of return of 15.5%

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wisdom, and good speech

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3 years ago
For the coming year, River Company estimates fixed costs at $109,000, the unit variable cost at $21, and the unit selling price
zzz [600]

Answer:

Instructions are below.

Explanation:

Giving the following information:

Fixed costs= $109,000

Unit variable cost= $21

Selling price= $85.

To calculate the break-even point in units, we need to use the following formula:

Break-even point in units= fixed costs/ contribution margin per unit

Break-even point in units= 109,000/ (85 - 21)

Break-even point in units= 1,703 units

Now, we need to include the desired profit:

Break-even point in units= (fixed costs + desired profit) / contribution margin per unit

Break-even point in units= (109,000 + 150,000) / 64

Break-even point in units= 4047 units

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Fixed costs= (109,000)

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8 0
2 years ago
The XYZ Chemical Company must ship 9,500 gallons of pesticides from its plant in Cincinnati, Ohio, to a customer in Columbia, Mi
never [62]

Answer:

Henderson  = $1,200

Central States = $1,000

Based on the calculations, Central States Railroad is better at a lower cost than Henderson

Explanation:

The question is to do an evaluation of the costs of use Henderson Bulk Trucking Company or the Central States Railroad

Step 1) Determine the cost of using Henderson

What is the cost per tank  truck = $600

What is the capacity in gallons = 700 galloons

However, since XYZ Chemical needs to ship 9,600 gallons, it means it will make use of 2 trucks from Henderson as follows

The cost of Henderson Bulk Trucking = $600 x 2 = $1,200

Step 2) Determine the cost of using Central Railroad

What is the cost per tank  truck = $1000

What is the capacity in gallons = 23,500 galloons

since XYZ Chemical needs to ship 9,600 gallons, it means it will make use of only one of the trucks

The cost of Central Roilroad= $1000 x 1 = $1,000

Based on the calculations, Central States Railroad is better at a lower cost than Henderson

3 0
3 years ago
What is the present value of a security that will pay $34,000 in 20 years if securities of equal risk pay 8% annually? Round you
OLga [1]

Answer:

present value = $7296.14

Explanation:

given data

future value =  $34,000

time t = 20 year

rate r = 8% = 0.08

solution

we apply here future value formula for get present value that is

future value = present value × (1+r)^{t}    .....................1

put her value and we get

$34,000 = present value ×  (1+0.08)^{20}

present value = \frac{34000}{1.08^{20}}

present value = \frac{34000}{4.660}

present value = $7296.14

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