Purchase Solution

Calculating IRR by interpolation

Not what you're looking for?

Ask Custom Question

Hoboken Ferry is elevating two different ferries. The Weehawken and the Hoboken. The economic data is as follows.

Weehawken Hoboken
Initial Investment $6 million $8 million
Yearly Revenue $4 million $6 million
Annual Maintenance Cost $2 million $3 million
Service Life 10 10

a) Calculate the IRR for Weehawken.
Please use interpolation. (Hint: Use i = 30% to 40% for interpolation)

b) Calculate the IRR for Hoboken.

Purchase this Solution

Solution Summary

The solution describes the steps to calculate IRR by interpolation.

Solution Preview

Please refer attached file for better clarity of formulas and table.

Solution:

Net Cash flow in Year 0=initial investment=($6,000,000)
Net cash flow in year 1-10=Revenue-Maintenance=2000000
Let us calculate PV of cash flows at various rates (30%, 31%, 32%, ....40%)

Year End Net Cash flow PV @ 30% PV @ 31% PV @ 32% PV @ 40%
n Cn Cn/(1+30%)^n Cn/(1+31%)^n Cn/(1+32%)^n Cn/(1+40%)^n
0 -6,000,000 -6,000,000 -6,000,000 -6,000,000 -6,000,000
1 2,000,000 1,538,462 1,526,718 1,515,152 1,428,571
2 2,000,000 1,183,432 1,165,433 1,147,842 1,020,408
3 2,000,000 910,332 889,644 869,577 728,863
4 2,000,000 700,256 679,117 658,771 520,616
5 2,000,000 538,658 518,410 499,069 371,869
6 2,000,000 414,352 395,733 378,082 265,621
7 2,000,000 318,733 302,086 286,426 189,729
8 2,000,000 245,179 230,600 216,989 135,521
9 2,000,000 ...

Solution provided by:
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution


Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.