Aaron Manufacturing Inc. intends to invest $70,000 in a modernization capital project that will generate the following
Question:
Aaron Manufacturing Inc. intends to invest $70,000 in a modernization capital project that will generate the following cash inflows during eight years:
Year___________________________
1 ……………………………$12,000
2 …………………………… 17,000
3 …………………………… 18,000
4 …………………………… 23,000
5 …………………………… 15,000
6 …………………………… 11,000
7 …………………………… 9,000
8 …………………………… 8,000
1. Calculate the NPV at 12% and 18%.
2. Calculate the internal rate of return of the capital project.
3. If the annual cash flow were an even $15,000 per year for eight years, what would be the NPV at 12% and 18%?
4. What level of annual cash flow would be required to obtain a 20% IRR?
5. How would the results of (1) and (2) change if there was a capital recovery of $40,000 at the end of year 8?
Internal Rate of ReturnInternal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
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