Question

Gore Global is considering the two mutually exclusive projects below. The cash flows from the projects are summarized below.

Year ManBearPig Project Cash Flow Flying Car Cash Flow
0 -$100,000 -$200,000
1 25,000 50,000
2 25,000 50,000
3 50,000 80,000
4 50,000 100,000
What is the Flying Car's internal rate of return (IRR) at a 12% cost of capital?

A) 12.7%

B) 14.6%

C) 15.9%

D) 13.0%

E) 10.0%

Answer 1

To calculate the IRR for the Flying Car project at a 12% cost of capital, use the trial-and-error method or a financial calculator to find the discount rate that makes the present value of cash inflows equal the initial investment. The IRR is approximately 14.57%.

Step-by-step explanation:

To calculate the internal rate of return (IRR) for the Flying Car project, we need to find the discount rate at which the present value of the cash inflows equals the initial investment. We can use the trial-and-error method or a financial calculator to find the IRR. Inputs the cash flows into the calculator and adjust the discount rate until the present value equals the initial investment. At a 12% cost of capital, the IRR for the Flying Car project is approximately 14.57%.

Answer 2

D

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator

Flying Car

Cash flow in year 0 = -$200,000

Cash flow in year 1 = 50,000

Cash flow in year 2 = 50,000

Cash flow in year 3 =80,000

Cash flow in year 4 =100,000

IRR = 13%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.