You have the following information regarding a major moderni

You have the following information regarding a major modernization project you are evaluating and the project life is 4 years (all $ in 1000): Initial investment $700 Profits in year 1 $100 Profits in years 2,3,4 increase by $75 more every year If your company’s MARR is 6%, based on IRR analysis is this investment economically acceptable? Why or why not?

1. Cash flow diagram of your problem

2. Specify the model/equation used [e.g. P=F(1+i)-N ]

3. Specify the values of each parameter [e.g. i=0.05 or 5% ]

4. Show your work for how you calculate your numerical results.

5. Report dollar value with cents (e.g. $253.12),

6. Answer the question of the problem with a complete sentence that includes your numerical justification

Solution

Years Cash flow ($ in 1000) 0 -700 1 100 2 175 100+75 3 250 175+75 4 325 250+75 Using trial and error we would calculate IRR of the project Assuming IRR is 7% Years Cash flow ($ in 1000) Discounting factor @ 7% Present Value 0 -700 1/(1.07^0) 1 -700 1 100 1/(1.07^1) 0.934579 93.45794 2 175 1/(1.07^2) 0.873439 152.8518 3 250 1/(1.07^3) 0.816298 204.0745 4 325 1/(1.07^4) 0.762895 247.9409 -1.67487 Assuming IRR is 6.911% Years Cash flow ($ in 1000) Discounting factor @ 6.911% 0 -700 1/(1.06911^0) 1 -700 1 100 1/(1.06911^1) 0.935357 93.53574 2 175 1/(1.06911^2) 0.874894 153.1064 3 250 1/(1.06911^3) 0.818338 204.5846 4 325 1/(1.06911^4) 0.765439 248.7676 -0.00575 The IRR of the project is 6.911% The IRR of the project is 6.911% which is more than the MARR of the company of 6% and hence the project should be accepted