Question

Sunland Corporation is considering investing in a new facility. The estimated cost of the facility is $2,336,000. It will be used for 12 years, then sold for $740,000. The facility will generate annual cash inflows of $398,000 and will need new annual cash outflows of $127,000. The company has a required rate of return of 7%. Calculate the internal rate of return on this project, and discuss whether the project should be accepted. (Round answer to 0 decimal places, eg. 13\%)

Answer 1

The internal rate of return for the project is approximately 11%. The project should be accepted since the IRR is greater than the company's required rate of return of 7%.

Step-by-step explanation:

The internal rate of return (IRR) is a measure used to determine the profitability of an investment. To calculate the IRR for the Sunland Corporation's project, we need to find the discount rate at which the net present value (NPV) of the project is zero. In this case, the estimated cost of the facility is $2,336,000, the annual cash inflows are $398,000, and the annual cash outflows are $127,000. The cash flow at the end of the project is the salvage value of $740,000. By calculating the IRR, we find that it is approximately 11%. The project should be accepted if the IRR is greater than the company's required rate of return, which in this case is 7%. Therefore, since the IRR is 11% (greater than 7%), the project should be accepted.