Candela Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: $$\begin{array} { | r | r | }
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & 235,000 \
\hline 3 & 140,000 \
\hline 4 & 98,000 \
\hline
\end{array}$$ The present value of $1:
$$\begin{array} { | c | c | c | c | c | c | }
\hline & 10 \% & 11 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ The IRR of the project would be ________.

Question

Candela Cable Company is considering investing $450,000 in telecommunications equipment that has an estimated life of five years with no residual value.The cash flows are as shown below: $$\begin{array} { | r | r | } 
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & 235,000 \
\hline 3 & 140,000 \
\hline 4 & 98,000 \
\hline
\end{array}$$ The present value of $1:
$$\begin{array} { | c | c | c | c | c | c | } 
\hline & 10 \% & 11 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ The IRR of the project would be ________.

Quizplus · Accepted Answer

The IRR is the discount rate that makes the NPV of the project equal to zero. In this case, the NPV is positive at 12% and negative at 13%. Therefore, the IRR must be between 12% and 13%.

Candela Cable Company Is Considering Investing $450,000 in Telecommunications Equipment