Question

Wildhorse, Inc., a resort management company, is refurbishing one of its hotels at a cost of $6,336,382. Management expects that this will lead to additional cash flows of $1,460,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Wildhorse go ahead with this project?

Answer 1

Answer and Explanation:

The computation of the IRR is shown below:

Year       Particulars       Amount (in $)

0            Initial cost             -6,336,382

1 Year 1 cash inflows 1,460,000

2 Year 2 cash inflows 1,460,000

3 Year 3 cash inflows 1,460,000

4 year 4 cash inflows 1,460000

5 Year 5 cash inflows 1,460,000

6 Year 6 cash inflows  1,460,000

IRR                                         10.12%  

Perform the IRR formula i.e.

= IRR() in excel

Now the net present value is

= Present value of cash inflows - initial investment

= ($1,460,000 × 4.1114) - $6,336,382

= $6,002,644 - $6,336,382

= -$333,738

The 4.1114 is the PVIFA factor of 6 years at 12%

hence, the Wildhorse should not go ahead with the project