Question

Heap Corporation is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project? (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice $74,340 $77,660 $81,810 $90,000

Answer 1

Answer:

$77,660

Explanation:

IRR signifies the interest rate where the net present value equals zero.

In order to reverse work the investment, the present values of the cash flow from this new project - when discounted at 10% should equal the amount of investment.

IRR signifies that Initial outlay - PV Cash flows @ 10% = 0

We calculate the present values as,

PV = 40,000 * (1 / 1+0.10)     +      50,000 * [1 / ((1+0.10)^2)}

PV = $77,685.9 (rounded off)

This is closest to $77,660, which is the initial outlay required to to generate above mentioned pc vash flows and an irr of 10%.

Hope that helps.