Question

A contract between BF Goodrich and the Steelworkers Union of America called for the company to spend $100 million in capital investment to keep the facilities competitive. The contract also required the company to provide buyout packages for 400 workers. If the average buyout package is $100,000 and the company is able to reduce costs by $20 million per year, what rate of return will the company make over a 10-year study period? Assume all of the company’s expenditures occur at time 0 and the savings begin one year later. !!!Can you show solution without using excel please!!!

Answer 1

Initial Investment: $100 Million

Total Buyout Package: 400 * 0.1 = 40 Million

So the total Initial Investment: (100 + 40) = $140 Million

The NPV will be equal to 0 in the estimation of the IRR using the formula.

So,

Or, -140 + 20 (P/A, i, 10) = 0

Or, 20 (P/A, i, 10) = 140

Or, (P/A, i, 10) = 140 / 20 = 7

So the required Rate of Return will be 7% (To be precise, we get the IRR value by using excel function is 7.07%. As you asked for the solution without using Excel. So here it is)

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