Question

Maxwell Feed & Seed is considering a project that has the following cash flow data. What...

Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows −$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 a. 2.31% b. 2.82% c. 3.10% d. 2.08% e. 2.57%

Homework Answers

Answer #1

IRR = Lower rate + (NPV(L)/NPV(L)-NPV(H)) * (higher rate - lower rate)

Here let lower rate = 2% and higher rate = 3%

Year Cash flow PVF @ 2% PV
0 -9500 1 -9500
1 2000 0.9803922 1960.78
2 2025 0.9611688 1946.37
3 2050 0.9423223 1931.76
4 2075 0.9238454 1916.98
5 2100 0.9057308 1902.03
NPV 157.93
Year Cash flow PVF @ 3% PV
0 -9500 1 -9500
1 2000 0.970873786 1941.75
2 2025 0.942595909 1908.76
3 2050 0.915141659 1876.04
4 2075 0.888487048 1843.61
5 2100 0.862608784 1811.48
NPV -118.37

So IRR = 2% + 157.93 / (157.93-(-118.37)) * (*3-2) = 2.57%

OPTION E : 2.57%

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