Matusadona Company plans to invest £450,000 in a new factory. With a discount rate of 14 per cent, the present value from the factory is £483,000. To yield a 14 per cent internal rate of return, the actual investment cost cannot exceed the £450,000 estimate by more than

Question

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The present value from the factory is given as £483,000. This means that if the company invests £450,000 at a discount rate of 14%, it will receive £483,000 in return.

To calculate the maximum actual investment cost that will yield a 14% internal rate of return, we can use the IRR formula:

NPV = 0 = -Investment Cost + (Cash Inflows/ (1+IRR)^t)

Solving for the investment cost:

Investment Cost = (Cash Inflows/ (1+IRR)^t)

Investment Cost = (£483,000 / (1+0.14)^0)

Investment Cost = £421,052.63

Therefore, the actual investment cost cannot exceed the estimated cost of £450,000 by more than (£421,052.63 - £450,000) = £28,947.37.

The closest option to this value is B) £33,000, therefore the correct choice is B).

Matusadona Company Plans to Invest £450,000 in a New Factory