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Carla Vista, Inc., a resort management company, is refurbishing one of its hotels at a cost...

Carla Vista, Inc., a resort management company, is refurbishing one of its hotels at a cost of $8,226,621. Management expects that this will lead to additional cash flows of $1,890,000 for the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Carla Vista go ahead with this project? (Round answer to 2 decimal places, e.g. 5.25%.) The IRR of this project is %

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Answer #1

In the given case, Carla will be likely to renovate the hotel at a cost of $8,226,621 which will generate cash flows of $1,890,000 for next 6 years. For such project, IRR has to be computed.

Following is the formula table for computation of IRR as per the given information:

Following is the computation of IRR of the project as per given information:

Thus the IRR of the project is 10.02% as per the given information.

If the cost of capital of such project is 12% then Carla should not go ahead with such project as such project will result in negative NPV.

Hence Carla should not continue with the project with the given cost of capital.

Following is the decision critera whether to go ahead with project or not:

If there is till some doubt, then please ping me in the comment box, I would love to help.

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