Question 4.15: What is the internal rate of return of the Chaotic Industrie...
What is the internal rate of return of the Chaotic Industries project from Activity 4.2? (Hint: Remember that you already know the NPV of this project at 15 per cent (from Activity 4.12).)
Since we know that, at a 15 per cent discount rate, the NPV is a relatively large negative figure, our next trial is using a lower discount rate, say 10 per cent:
| Time | Cash flows £000 |
Discount factor 10% |
Present value £000 |
| Immediately | (150) | 1.000 | (150.00) |
| 1 year’s time | 30 | 0.909 | 27.27 |
| 2 year’s time | 30 | 0.826 | 24.78 |
| 3 year’s time | 30 | 0.751 | 22.53 |
| 4 year’s time | 30 | 0.683 | 20.49 |
| 5 year’s time | 30 | 0.621 | 18.63 |
| 6 year’s time | 30 | 0.564 | 16.92 |
| 6 year’s time | 30 | 0.564 | \underline{16.92} |
| NPV \underline{(2.46)} |
This figure is close to zero NPV. However, the NPV is still negative and so the precise IRR will be a little below 10 per cent.
Related Answered Questions
Question: 4.A.17
Verified Answer:
The minimum price is the amount required to cover ...
Question: 6.14
Verified Answer:
The current cost of trade credit is:
£
Bad ...
Question: 4.SE.5
Verified Answer:
Newton Electronics Ltd
(a) Opt...
Question: 4.SE.6
Verified Answer:
Chesterfield Wanderers
(a)
Player option
Yea...
Question: 4.SE.1
Verified Answer:
Mylo Ltd
(a) The annual depreci...
Question: 4.5
Verified Answer:
The inflows and outflows are expected to be:
T...
Question: 4.6
Verified Answer:
The PP for each project is three years and so the ...
Question: 4.18
Verified Answer:
Your answer should be as follows:
(a) [...
Question: 4.2
Verified Answer:
The vans will save the business £30,000 a year (th...
Question: 4.12
Verified Answer:
Remember that the inflows and outflow are expected...