IRR, investment? life, and cash inflows Oak Enterprises accepts projects earning more than the? firm's 11?% cost...

Free

70.2K

Verified Solution

Question

Finance

IRR, investment? life, and cash inflows OakEnterprises accepts projects earning more than the? firm's 11?%cost of capital. Oak is currently considering a 13?-year projectthat provides annual cash inflows of ?$25,000 and requires aninitial investment of ?$222,100. ? (?Note: All amounts are after?taxes.)
a. Determine the IRR of this project. Is it? acceptable?
b. Assuming that the cash inflows continue to be ?$25,000 per?year, how many additional years would the flows have to continue tomake the project acceptable? (that is, to make it have an IRR of11?%)?
c. With the given? life, an initial investment of ?$222,100?,and cost of capital of 11?%, what is the minimum annual cash inflowthe investment would have to provide in order for this project tomake sense for? Oak's shareholders?

Answer & Explanation Solved by verified expert

4.3 Ratings (799 Votes)

a). IRR (using IRR() function) is 5.94%. Since it is less than the cost of capital (11%), it is not acceptable.

Year (n)	Cash flow (CF)
0	(2,22,100)
1	25,000
2	25,000
3	25,000
4	25,000
5	25,000
6	25,000
7	25,000
8	25,000
9	25,000
10	25,000
11	25,000
12	25,000
13	25,000
IRR	5.94%

b). PV = -222,100; PMT = 25,000; rate = 11%; FV = 0, CPT NPER.

N = 36.25 years

Additional number of years = 36.25-13 = 23.25 years.

c). PV = -222,100; N = 13; rate = 11%; FV = 0, CPT PMT.

PMT = 32,904.34

Annual cash flows would have to be 32,904.34 for the project to make sense for the shareholders.

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

IRR, investment? life, and cash inflows OakEnterprises accepts projects earning more than the? firm's 11?%cost of capital. Oak is currently considering a 13?-year projectthat provides annual cash inflows of ?$25,000 and requires aninitial investment of ?$222,100. ? (?Note: All amounts are after?taxes.)a. Determine the IRR of this project. Is it? acceptable?b. Assuming that the cash inflows continue to be ?$25,000 per?year, how many additional years would the flows have to continue tomake the project acceptable? (that is, to make it have an IRR of11?%)?c. With the given? life, an initial investment of ?$222,100?,and cost of capital of 11?%, what is the minimum annual cash inflowthe investment would have to provide in order for this project tomake sense for? Oak's shareholders?