Respuesta :
Answer:
IRR is 3%. Reject the project.
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; [tex]NPV= \frac{cash\ flow}{(1+r)^{n} } -initital\ investment[/tex]
Assuming at IRR approximately 3% we will have zero NPV
[tex]NPV= \frac{\$ 52000}{(1+3\%)^{1} }+\frac{\$ 52000}{(1+3\%)^{2}}+\frac{\$ 52000}{(1+3\%)^{3}}+\frac{\$ 52000}{(1+3\%)^{4}} +\frac{\$ 52000}{(1+3\%)^{5}} -\$ 238160[/tex]
⇒ [tex]NPV= \frac{\$ 52000}{(1+0.03)^{1} }+\frac{\$ 52000}{(1+0.03)^{2}}+\frac{\$ 52000}{(1+0.03)^{3}}+\frac{\$ 52000}{(1+0.03)^{4}} +\frac{\$ 52000}{(1+0.03)^{5}} -\$ 238160[/tex]
⇒ [tex]NPV=50485.436+49014.987+47588.542+46201.688 +44858.523 -\$ 238160[/tex]
⇒ [tex]NPV=\$ 238150 -\$ 238160[/tex]
∴ 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.
