Question

Sodu can expand a succesful manufacturing line for an immediate investment of $91 million. The company anticipates that the project will generate a cash flow of $163 million in 7 years (and only in that one year). The company considers the required rate of retum of the project to be 12.65% This is a two-part question. YOU MUST GET BOTH PARTS CORRECT TO EARN 5 POINTS. PART 1. Calculate the project's internal rate of return Notes on Formatting: Place your answer in PERCENTAGE form with two decimal places of accuracy. For exmaple, if your answer is thirteen point seventy five percent, then place your answer as 13.75 and NOT as .1375 NOW GO ON TO THE SECOND PART PART 2. Given your estimate of the IRR, should Sodu accept or reject the project? Type the word "yes" if you believe they should go ahead with the project or the word "no" if you believe they should not go ahead with the project.

Answer 1

Format B12 fz =IRR(82:89) Years Project X 2 0 S 91.00) 9163.00 10 11 ROR 12.65% 8.68%) 12 13 IRR

Lets call this project X.

Part 1. The project Shows an initial cash outlay of $91 million and it will generate a cash flow of $163 million in the seventh year.Therefore, the cashflows for the initial six years are zero.

We can easily compute the IRR using the IRR Function(=IRR(Values)) in the excel. The IRR is 8.68% for the project.

CF1 CF2 ล. Or RY CFn ROR) n 0 Where: CFo Initial Investment/ Outlay CF1, CF2, CF3. CFn Cash flows n Each Period N Holding Period NPV Net Present Value IRR Internal Rate of Return

Or you can use the following formula.The CF₀ will be 91 million, CF₇ Would be 163 million and CF1-6 would be zero, as there are no cash flows in that period. But i'd suggest using excel or a financial calculator for this.

Part 2. This project should definitely be rejected, as the IRR of the project is significantly lower than the rate of return of the project. Which means that the NPV of the project would be negative. Hence, this project is not profitable.