Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $1,740,777. It will be used for 12 years, then sold for $710,400. The facility will generate annual cash inflows of $372,400 and will need new annual cash outflows of $150,200. The company has a required rate of return of 7%. Calculate the internal rate of return.

Question

Magdalena Case

Business

21 May, 00:49

Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $1,740,777. It will be used for 12 years, then sold for $710,400. The facility will generate annual cash inflows of $372,400 and will need new annual cash outflows of $150,200. The company has a required rate of return of 7%. Calculate the internal rate of return.

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Ansley Weaver · Answer 1

The internal rate return (IRR) is 8,57%. Since the rate return is higher than 7% the investment is attractive for Viera Corporation and should do it

Explanation:

In order to calculate the IRR the inflows (positive) and outflows (negative) must be ordered in time between the 1st year and 12th year, when the facility is sold. In this case the year 1 is negative because the company paid the investment (negative $1.740.777), and between year 2 and 11 the net cahsflow must be considered (positive $222.200). Finally, year 12 is sold the facility (at the beginning of the year so there is no additional cashflows to considered). With the table arranged from year 1 to year 12, and each year with the correct cashflow, using the IRR formula of Microsoft Excel will allos to get the IRR of such investment project.