Question

The Expresso Roast Corporation (ERC) is considering expanding its product lines by acquiring Mellow-Man Tea. The company’s founder is obscenely wealthy and will operate these lines for only one year before retiring and will therefore use only a one-year planning horizon. Mellow-Man Tea has a cost of $80,000 and is expected to produce benefits in one year of $65,000. While this line is not as immediately profitable as the other alternative, it is estimated that this line could be sold upon the founder’s retirement in one year for $20,000. The health benefits of tea make this a less risky investment and ERC’s CFO has recommended a risk-premium of 10%. All future cash benefits will occur at the end of the year. The rate of return on US T-Bills is 4%. What is the IRR for this investment? Just enter the number and sign of your answer. Give your answer in percents (do not use the percent sign).

Answer 1

Answer:

IRR = 5.05%

Explanation:

Internal rate of return (IRR) refers to the interest rate that makes the net present value (NPV) both the positive and negative cash flows of an investment equal zero.

See the two attached, an excel file and a photo file, for the calculation and further explanation. Note that the two files contain the same information but they are both attached to ease learning.