Question
Problem I: A new product line is proposed for investment. The summary of the projected and annual...
Problem I: A new product line is proposed for investment. The summary of the projected and annual receipts for the new product line is shown in the table below. As a business analyst you have been asked to calculate the IRR for this investment opportunity. Furthermore, you have been asked to show the effect of changing IRR with respect to the PW (draw Pw vs i% using a range of İ% from 10% to 100%; use increment of 10) and conclude your analysis with a recommendation. (MARR is 10%) Net Cash Flow -$450,000 $42,500 +$92,800 +$386,000 +$614,600 -$202,200 End of Year
Answers
IRR is that rate of return at which the NPV is zero. This can be solved using excel Solver or using the IRR() function or by trial and error.
Year (n) Cash flow PW of CF 0 -4,50,000 -4,50,000.00 1 -42,500 -35,008.87 2 92,800 62,968.94 3 3,86,000 2,15,752.04 4 6,14,600 2,82,975.85 5 -2,02,200 -76,687.96 IRR 21.40% - IRR for the given series of cash flows = 21.40%
NPW vs IRR graph:
IRR PW 10% 1,72,295.14 20% 17,540.51 30% -91,356.73 40% -1,69,950.17 50% -2,27,943.21 60% -2,71,577.00 70% -3,04,976.79 80% -3,30,936.72 90% -3,51,391.22 100% -3,67,706.25
The IRR is much higher than the MARR of 10% so this project should be undertaken.
PW vs IRR 2,00,000.00 1,00,000.00 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1,00,000.00 2,00,000.00 3,00,000.00 4,00,000.00 IRR (96)
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