Question

Velma and Keota is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a five-year useful life, Will cost $19,680.96, and will generate expected cash inflows of $4800 per year. The second investment is expected to have a useful life of three years, will cost $12,885.48, and will generate expected cash inflows of $5,000 per year. Assume that Velma and Keota has the funds available to except only one of the opportunities.

a. calculate the internal rate of return of each investment opportunity

b. based on the internal rate of return, which opprotunity should Velma and Ketoa select?

c. discuss other factors that Velma and Ketoa should consider in the investment decision

will cost $19,680.96, and will generate expected cash inflows of $4,800 per year. The second in expected cash inflows of $5,000 per year. Assume that V&K has the funds available to accept oly vestment is expected to have a useful life of three years, will cost $12,885.48, and will gener one of the opportunities. Required a. Calculate the internal rate of return of each investment opportunity b. Based on the internal rates of return, which opportunity should V&K select? c. Discuss other factors that V&K should consider in the investment decision.

Answer 1

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Ans 10-10A: (a) IRR of First Investment is : 7% Workings: IRR has to be done by applying hit and trial method. Let's assume 7% Year Cash Inflow | PV @ 7% 0 $ -19,680.96 1 $ 4,800.00 =1/1.07 4,800.00 =1/(1.07)^2 4,800.00 =1/(1.07)^3 4 $ 4,800.00 =1/(1.07)^4 5 $ 4,800.00 =1/(1.07)^5 NPV: $ $ PV Factor 1 0.9346 0.8734 0.8163 0.7629 0.7130 Amount -19,680.96 4,485.98 4,192.51 3,918.23 3,661.90 3,422.33 -0.01 $ $ $ IRR of Second Investment is : 8% Workings: IRR has to be done by applying hit and trial method. Let's assume 8% Year 1 Cash Inflow $ -12,885.48 $ 5,000.00 $ 5,000.00 $ 5,000.00 PV @ 8% 1 =1/1.08 = 1/(1.08)^2 =1/(1.08)^3 NPV: PV Factor 1 0.9259 0.8573 0.7938 $ $ $ $ $ Amount -12,885.48 4,629.63 4,286.69 3,969.16 0.00 3

(b) Based on the internal rate of return V&K Should chose the second investment, as the IRR of second investment is 8% (higher than first investment of 7%) (c) 2 The followings are the other factor should be consider for investment decession: Availability of correct set of standard to select maximum return focusing attention. Availability of capital. Cost focusing attention as a financial analysis.

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Ans 10-10A: (a) IRR of First Investment is : 7% PV Factor 1 Workings: IRR has to be done by applying hit and trial method. Let's assume 7% Year Cash Inflow PV @ 8% $ -19,680.96 1 $ 4,800.00 =1/1.07 $ 4,800.00 = 1/(1.07)^2 3 $ 4,800.00 =1/(1.07)^3 4,800.00 = 1/(1.07)^4 5 $ 4,800.00 =1/(1.07)^5 NPV: U AWN 0.9346 0.8734 0.8163 0.7629 0.7130 $ $ $ $ IS $ $ Amount -19,680.96 4,485.98 4,192.51 3,918.23 3,661.90 3,422.33 -0.01 MIDI. IRR of Second Investment is : 8% Workings: IRR has to be done by applying hit and trial method. Let's assume 8% Year Cash Inflow PV @ 8% 0 $ -12,885.48 1 1 $ 5,000.00 =1/1.08 2 $ 5,000.00 =1/(1.08)^2 3 $ 5,000.00 =1/(1.08)^3 NPV: PV Factor 1 0.9259 0.8573 0.7938 $ $ $ $ $ Amount -12,885.48 4,629.63 4,286.69 3,969.16 0.00

(b) Based on the internal rate of return V&K Should chose the second investment, as the IRR of second investment is 8% (higher than first investment of 7%) (c) 2 The followings are the other factor should be consider for investment decession: Availability of correct set of standard to select maximum return focusing attention. Availability of capital. Cost focusing attention as a financial analysis.