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# Calculate NPV, IRR, maximum cost of capital

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Problem 1

For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable.

Project A Project B Project C Project D
Initial investment (CF0): \$90,000 \$490,000 \$20,000 \$240,000

Year (t) Cash inflows (CFt)
1 \$20,000 \$150,000 \$7,500 \$120,000
2 25,000 150,000 7,500 100,000
3 30,000 150,000 7,500 80,000
4 35,000 150,000 7,500 60,000
5 40,000 - 7,500 -

There is no data for year 5 for Projects B and D. Need NPV and IRR for all if possible, please.

Problem 2:

Long-term investment decision, IRR method Billy and Mandy Jones have \$25,000 to invest. On average, they do not make any investment that will not return at least 7.5% per year. They have been approached with an investment opportunity that requires \$25,000 upfront and has a payout of \$6,000 at the end of each of the next 5 years. Using the internal rate of return (IRR) method and their requirements, determine whether Billy and Mandy should undertake the investment.

Use Attached NPV IRR spreadsheet. Both problems should be on one page of one excel spreadsheet.

\$2.19

## Eddison Electronics Co (EEC) NPV, IRR, Payback & Memo to President

EEC's president announced that one of its largest suppliers is open to being acquired. Analyze the feasibility of acquiring this supplier using net present value (NPV), internal rate of return (IRR), and payback methods.

The following assumptions are the best knowledge at this time:

1. EEC will save \$500,000 annually for 10 years.

2. Cost of capital is 14%

3. The investment to buy the supplier would be \$2,000,000.

REQUIRED:

Show EEC buy the supplier? Explain.

Which method was the most useful? Least useful?

If cost of capital was 25%, would your recommendation change? Explain.

If the annual savings was lower than \$500,000, would your recommendation change? Explain.

How low can the annual savings go and still make the deal attractive?

Draft a memo to the president recommending a course of action supported by your detail findings.

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