Simkins Renovations Inc. is considering a project that has the followi

QUESTION

Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the projects IRR? Note that a projects IRR can be less than the WACC (and even negative), in which case it will be rejected.Year 0 1 2 3 4Cash flows -$850 $300 $290 $280 $270Answer13.13%14.44%15.89%17.
Formula for IRR: IRR=Lower Discount factor [Positive NPV/(NPV at lower discount rate NPV at higher discount rate)] Difference between discount rates Year Cash Flows Discount rate at 10% Discount rate at 13% Discount rate at 14% PVF PV PVF PV PVF PV 0 ($850) 1 ($850) 1 ($850) 1 ($850) 1 $300 0.909 $272.70 0.885 $265.50 0.877 $263.10 2 $290 0.826 $239.54 0.783 $227.07 0.769 $223.01 3 $280 0.751 $210.28 0.693 $194.04 0.675 $189 4 $270 0.683 $184.41 0.613 $165.51 0.592 $159.84 Total NPV $56.93 $2.12 ($15.05) Here consider the

discount rate 13% and 14% for measuring IRR IRR=13% [2.12/(2.12 15.05)] (14%-13%)=13% 0.123(1%)=13.0126% Therefore, IRR=13.13% IRR is the discount rate where the NPV value becomes zero. Decision rule in case of IRR: The project can be accepted if IRR rate is less than the risk adjusted rate of return that is: risk premium and risk free return total.

ANSWER:

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