IRR investment life and cash inflows Oak Enterprises accepts

?IRR, investment? life, and cash inflows???

Oak Enterprises accepts projects earning more than the? firm\'s 12% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of ?$50,000 and requires an initial investment of $315,100.

? (?Note:All amounts are after? taxes.)

a.??Determine the IRR of this project. Is it? acceptable?

b.??Assuming that the cash inflows continue to be ?$50,000 per? year, how many additional years would the flows have to continue to make the project acceptable? (that is, to make it have an IRR of 12?%)?

c.??With the given? life, initial? investment, and cost of? capital, what is the minimum annual cash inflow that the firm should? accept?

Solution

a.

Use IRR function in Excel

IRR = 9.42%

b. FV = 0, PMT = 50,000, PV = -315,100, rate = 12%

use Nper function in Excel

number of years = 12.46

c, PV = -315,100, rate = 12%, N = 10 FV = 0

use PMT function in Excel

minimum payments = 55,767.71