Question

Blossom, Inc., a resort management company, is refurbishing one of its hotels at a cost of $6,999,707. Management expects that this will lead to additional cash flows of $1,380,000 for each of the next six years. What is the IRR of this project? If the appropriate cost of capital is 12 percent, should Blossom go ahead with this project? (Round answer to 4 decimal places, e.g. 5.2516\%.) The IRR of this project is The firm shoul the project.

Answer 1

The Internal Rate of Return (IRR) for the project is approximately 15.3606%. Blossom, Inc. should go ahead with this project because the IRR is higher than the cost of capital.

Step-by-step explanation:

The Internal Rate of Return (IRR) is a financial metric used to determine the profitability of an investment project. It represents the discount rate that makes the net present value (NPV) of the project's cash flows equal to zero. To calculate the IRR, we need to find the discount rate at which the present value of the cash inflows from the project equals the present value of the initial investment.

In this case, the initial investment is $6,999,707, and the cash flows for each of the next six years are $1,380,000. We can use a financial calculator or spreadsheet software to find the IRR. Using a financial calculator, the IRR for this project is approximately 15.3606% when rounded to four decimal places. Now let's compare this IRR to the appropriate cost of capital, which is given as 12%. If the IRR is higher than the cost of capital, the project is considered financially attractive and should be pursued. In this case, since the IRR (15.3606%) is higher than the cost of capital (12%), Blossom should go ahead with this project.