Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below: The present value of $1 factors are given below: The IRR of the project would be:

Question

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below:  The present value of $1 factors are given below:  The IRR of the project would be:

Quizplus · Accepted Answer

To calculate the IRR, we need to find the discount rate at which the present value of the cash inflows equals the initial investment of $450,000.

Using the present value of $1 factors, we can calculate the present value of each cash flow as follows:

Year 1: $100,000 × 0.909 = $90,900
Year 2: $125,000 × 0.826 = $103,250
Year 3: $150,000 × 0.751 = $112,650
Year 4: $200,000 × 0.683 = $136,600
Year 5: $100,000 × 0.621 = $62,100

Total present value = $505,500

Now we can use trial and error or a financial calculator to find the discount rate that makes the present value equal to the initial investment. Using trial and error, we can try different discount rates until we get a present value close to $450,000.

- At 12%, the present value is $462,904
- At 13%, the present value is $430,373

Therefore, the IRR of the project is between 12% and 13%. Answer choice A is correct.

Canbera Company Is Considering Investing $450,000 in Telecommunications Equipment Which