Question

Technology corp. is considering a $238,160 investment in a new marketing campaign that it anticipates will provide annual cash flows of $52,000 for the next five years. the firm has a 6% cost of capital. what should the analysis indicate to the firm's managers?

Answer 1

IRR is 3%. Reject the project.

Step-by-step explanation:

Given: Investment= $238160.

Cash flow= $52000

Time period= 5 years

Cost of capital= 6%.

Now, finding IRR for the investment to be made on a new marketing campaign.

Formula;
`NPV= (cash\ flow)/((1+r)^(n) ) -initital\ investment`

Assuming at IRR approximately 3% we will have zero NPV

`NPV= (\$ 52000)/((1+3\%)^(1) )+(\$ 52000)/((1+3\%)^(2))+(\$ 52000)/((1+3\%)^(3))+(\$ 52000)/((1+3\%)^(4)) +(\$ 52000)/((1+3\%)^(5)) -\$ 238160`

⇒
`NPV= (\$ 52000)/((1+0.03)^(1) )+(\$ 52000)/((1+0.03)^(2))+(\$ 52000)/((1+0.03)^(3))+(\$ 52000)/((1+0.03)^(4)) +(\$ 52000)/((1+0.03)^(5)) -\$ 238160`

⇒
`NPV=50485.436+49014.987+47588.542+46201.688 +44858.523 -\$ 238160`

⇒
`NPV=\$ 238150 -\$ 238160`

∴ At IRR 3% company is almost close to equal of investment amount $238160, however the cost of capital to the firm is 6% in next five year, which will cause loss to the firm. Hence, project is rejected.