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: $$\begin{array} { | r | r | }
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & \$ 235,000 \
\hline 3 & \$ 140,000 \
\hline 4 & \$ 98,000 \
\hline
\end{array}$$ The present value of $1 factors are given below:
$$\begin{array} { | r | r | r | r | r | }
\hline & 10 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ 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: $$\begin{array} { | r | r | } 
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & \$ 235,000 \
\hline 3 & \$ 140,000 \
\hline 4 & \$ 98,000 \
\hline
\end{array}$$ The present value of $1 factors are given below:
$$\begin{array} { | r | r | r | r | r | } 
\hline & 10 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ The IRR of the project would be:

Quizplus · Accepted Answer

To find the IRR, we need to use the present value of cash flows formula and solve for the discount rate that makes the net present value (NPV) equal to zero.

$0 = -\$450,000 + \$120,000	imes\frac{1}{0.909} + \$235,000	imes\frac{1}{0.826} + \$140,000	imes\frac{1}{0.751} + \$98,000	imes\frac{1}{0.683} + C	imes\frac{1}{0.621}$

where C is the cash flow in year 5.

Solving for C, we get:

$C = \$450,000 - \$120,000	imes\frac{1}{0.909} - \$235,000	imes\frac{1}{0.826} - \$140,000	imes\frac{1}{0.751} - \$98,000	imes\frac{1}{0.683} \approx \$69,510$

Therefore, the IRR is the discount rate that makes the sum of the present values of cash flows equal to zero, which is the same as the discount rate that makes the NPV equal to zero:

$0 = -\$450,000 + \$120,000	imes\frac{1}{1+r} + \$235,000	imes\frac{1}{(1+r)^2} + \$140,000	imes\frac{1}{(1+r)^3} + \$98,000	imes\frac{1}{(1+r)^4} + \$69,510	imes\frac{1}{(1+r)^5}$

We can solve this using trial and error or interpolation. One method is to try different discount rates and see which one gives a NPV closest to zero. Using this method, we find that the IRR is between 12% and 13%.

Therefore, the answer is A) between 12% and 13%.

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