Question

The following are the net cash flows for a project under consideration:

F0 = - $100,000

F1 = - $2,000

F2 = - $77,200

F3 = - $3,920

F4 = $232,848

     a) Find all valid rates of return for this project

     b) For what range of MARR should this project be accepted using FW as the figure of merit?

Answer 1

Valid rate of return is Internal rate of return (IRR)

And IRR is rate of return at which Net Present value (NPV) is zero,

And NPV is zero when Present value of inflow = Present value of Outflow

:- $232848*PVF(r%,4period) = $100000 + $2000*PVF(r%,1period) + $77200*PVF(r%,1period) + $3920*PVF(r%,1period)

To calculate IRR(r) use hit and traial approach

Let r be 10%, then NPV = -9493.94

If r = 8%, then NPV will be = 0

Thus IRR = 8%

b) If IRR> MARR i.e when MAAR is less than 8% then this project should be accepted.