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 2 400,000 0.907029 362,812 0.889996 355,999 3 400,000 0.863838 345,535 0.839619 335,848 4 400,000 0.822702 329,081 0.792094 316,837 5 400,000 0.783526 313,410 0.747258 298,903 6 200,000 0.746215 149,243 0.704961 140,992 7 200,000 0.710681 142,136 0.665057 133,011 8 200,000 0.676839 135,368 0.627412 125,482 9 200,000 0.644609 128,922 0.591898 118,380 10 200,000 0.613913 122,783 0.558395 111,679 11 40,000 0.584679 23,387 0.526788 21,072 12 40,000 0.556837 22,273 0.496969 19,879 13 40,000 0.530321 21,213 0.468839 18,754 14 40,000 0.505068 20,203 0.442301 17,692 15 40,000 0.481017 19,241 0.417265 16,691 NPV 16,559 (91,423) IRR = 5% + [(16,559-0)/ (16,559-(-91,423))] = 5% + 0.15 = 5.15% b) If Cordia\'s opportunity cost of capital is 8%, then NPV will be: rate = 8% Year Cash flows discounting factor PV 0 (2,500,000) 1 (2,500,000) 1 400,000 0.925926 370,370.37 2 400,000 0.857339 342,935.53 3 400,000 0.793832 317,532.90 4 400,000 0.73503 294,011.94 5 400,000 0.680583 272,233.28 6 200,000 0.63017 126,033.93 7 200,000 0.58349 116,698.08 8 200,000 0.540269 108,053.78 9 200,000 0.500249 100,049.79 10 200,000 0.463193 92,638.70 11 40,000 0.428883 17,155.31 12 40,000 0.397114 15,884.55 13 40,000 0.367698 14,707.92 14 40,000 0.340461 13,618.44 15 40,000 0.315242 12,609.67 NPV (285,465.82) They should reject this project. c) The NPV in part b is negative, thus, we should reject this project in part (b). 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 2 400,000 0.907029 362,812 0.889996 355,999 3 400,000 0.863838 345,535 0.839619 335,848 4 400,000 0.822702 329,081 0.792094 316,837 5 400,000 0.783526 313,410 0.747258 298,903 6 200,000 0.746215 149,243 0.704961 140,992 7 200,000 0.710681 142,136 0.665057 133,011 8 200,000 0.676839 135,368 0.627412 125,482 9 200,000 0.644609 128,922 0.591898 118,380 10 200,000 0.613913 122,783 0.558395 111,679 11 40,000 0.584679 23,387 0.526788 21,072 12 40,000 0.556837 22,273 0.496969 19,879 13 40,000 0.530321 21,21.