Cordia Corporation is planning a 15 year project with an initial inv.pdf
1. Cordia Corporation is planning a 15 year project with an initial investment of $2,500,000.
The project will have $400,000 cash inflows per year in years 1-5 ;
$200,000 cash inflows in years 6-10, and
$40,000 cash inflows in years 11-15.
a) Determine this project's intemal rate of return.
b) If Cordia's opportunity cost of capital is 8%, should they accept or reject this project?
c) Explain your reason for your decision in part (b).
Solution
a) Computation of IRR:
IRR is an interest rate where the net present value of inflows are outflows equals zero.
With the help of trial and error method we can find the IRR:
First let us find from 5% rate and then we can increase or decrease as per the requirement (here,
our target is to get NPV= 0).
rate = 5%
rate = 6%
Year
Cash flows
discounting factor
PV
discounting factor
PV
0
(2,500,000)
1
(2,500,000)
1
(2,500,000)
1
400,000
0.952381
380,952
0.943396
377,358