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Internal Rate of Return and Free Cash Flow

1) Determine to the nearest percent the IRR on the following projects:

A) An initial outlay of $ 10,000 resulting in a free cash flow of $ 2000 at the end of year 1, $ 5000 at the end of year 2, and $ 8,000 at the end of year 3.

B) An initial outlay of $ 10,000 resulting in a free cash flow of $ 8000 at the end of year 1, $ 5000 at the end of year 2, and $ 2000 at the end of year 3.

C) An initial outlay of $ 10,000 resulting in a free cash flow of $ 2000 at the end of years 1 through 5 and $ 5000 at the end of year 6.

2) Visible Fences is introducing a new product and has an expected change in EBIT of $ 900,000. Visible Fences has a 34% marginal tax rate. This project will also produce $ 300,000 of depreciation per year. In addition, in year 1 this project will also cause the following changes:

Without the Project With the project
Accounts Receivable $ 55,000 $ 63,000
Inventory 55,000 70,000
Accounts Payable 90,000 106,000

What is the project's free cash flow in year 1?

Solution Summary

This solution calculates the internal rate of return and present value and determines the free cash flow of the project in year 1. All workings and formulas are shown in an Excel file.

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