Tanya Sinclair owner of Sinclair Fine Wine is considering in

Tanya Sinclair, owner of Sinclair Fine Wine, is considering investing $198,404 in a temperature-controlled wine storage room. She plans to rent space to customers and expects to generate $44,861 annually (rental charges less miscellaneous expenses other than depreciation). Assuming Tanya wishes to evaluate the project with a 7-year time horizon, what is the internal rate of return of the investment? (Ignore taxes.) Internal Rate of Return: % Should Tanya make the investment if her required rate of return is 11.00 %?

Solution

Tanya Sinclair Year Cash Flow P.V Factor at 11% for 7 Years P.V. 0 $ (198,404.00) 1 $ (198,404.00) 1 $      44,861.00 0.9009 $      40,415.27 2 $      44,861.00 0.81162 $      36,410.08 3 $      44,861.00 0.73119 $      32,801.91 4 $      44,861.00 0.65873 $      29,551.29 5 $      44,861.00 0.59345 $      26,622.76 6 $      44,861.00 0.53464 $      23,984.49 7 $      44,861.00 0.48166 $      21,607.75 NPV $      12,989.56 IRR= 13% IRR is greater than the required rate of return so Tanya should make the investment in the project.