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Question 1. What is the INTERNAL RATE OF RETURN for project A? (Assume a discount rate...

Question 1.

What is the INTERNAL RATE OF RETURN for project A? (Assume a discount rate of 8%)

Year Project A Project Z
0 -$35,000 -$350,000
1 17,000 110,000
2 17,000 110,000
3 16,000 105,000
4 15,000 100,000
5 14,000 100,000

36.74%

32.24%

28.71%

22.65%

Question 2.

What is the PROFITABILITY INDEX for project A? (Assume a discount rate of 8%)

Year Project A Project Z
0 -$35,000 -$350,000
1 17,000 110,000
2 17,000 110,000
3 16,000 105,000
4 15,000 100,000
5 14,000 100,000

0.20

0.41

0.82

0.95
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Homework Answers

Answer #1

1.Let irr be x%
At irr,present value of inflows=present value of outflows.

35000=17000/1.0x+17000/1.0x^2+16000/1.0x^3+15000/1.0x^4+14000/1.0x^5

Hence x=irr=36.74%(Approx).

2.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=17000/1.08+17000/1.08^2+16000/1.08^3+15000/1.08^4+14000/1.08^5

=$63570.43

NPV=Present value of inflows-Present value of outflows

=$63570.43-$35000

=$28570.43

PI=NPV/Present value of outflows

=$28570.43/$35000

=0.82(Approx).

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