ABC Ltd. estimated that a new store requires an initial investment of $800,000. This new store...
ABC Ltd. estimated that a new store requires an initial investment of $800,000. This new store will generate cash flows of $250,000 over the next 5 years. How much is the IRR on this new store? Based on a hurdle rate of 15%, should ABC Ltd go ahead with the new store? solve this question by trial and error method, using a financial calculator, using a spreadsheet.
Homework Answers
Solution:
| Computation of IRR | ||
| Year | Cash Flows | IRR |
| 0 | -$800,000.00 | 17.0% |
| 1 | $250,000.00 | |
| 2 | $250,000.00 | |
| 3 | $250,000.00 | |
| 4 | $250,000.00 | |
| 5 | $250,000.00 | |
As IRR is higher than hurdle rate of 15%, therefore ABC Ltd should go ahead with new store.
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