Question

Hosier and Wogan (H&W) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a four-year useful life, will cost $14,156.59, and will generate expected cash inflows of $3,900 per year. The second investment is expected to have a useful life of five years, will cost $15,164.51, and will generate expected cash inflows of $3,600 per year. Assume that H&W has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required

a.	Calculate the internal rate of return of each investment opportunity.

     

Answer 1

Answers

IRR for First Opportunity = 4%

IRR for Second Opportunity = 6%

Calculated as

First Opportunity

PV factor for IRR for First Opportunity = Investment/Net annual inflows

=$14156.59/$3900.

= 3.62989

So if we look at pv factor table against 4 years we will find the 3.62989 factor under 4%

hence answer =  4%

Second Opportunity

PV factor for IRR for First Opportunity = Investment/Net annual inflows

= $15164.51/3600

= 4.21236

So if we look at pv factor table against 5 years we will find the 4.21236  factor under 6%

So answer = 6%

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