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0== (1+IRR) 400,000 - 2,000,000 This is generally solved using financial calculators or software, but for the sake of approximation, we can start with our known NPV formula and trial and error around the given discount rate of 10%. Given the positive NPV at 10%, the IRR will be slightly higher than 10%. By trying 11%: 400,000 Year 1: (1+0.11) 400,000 1.11 360, 360.36 Year 2: 400,000 400,000 324, 782.08 (1+0.11) 1.2321 400,000 400,000 Year 3: (1+0.11) 1.36763 296, 197.37 400,000 400,000 Year 4: (1+0.11)4 1.51808 263, 894.00 400,000 400,000 Year 5: (1+0.11)5 1.68506 237,298.20 Year 6: 400,000 400,000 214,206.49 (1+0.11)6 1.87042 Year 7: 400,000 400,000 (1+0.11)" 2.07616 = 192, 702.24 400,000 Year 8: 400,000 173,318.33 (1+0.11) 2.30454 Adding these present values together: \text{NPV at 11%} = 360,360.36 + 324,782.08 + 296,197.37 +263,894.00 + 237,298.20 + 214,206.49 + 192,702.24 + 173,318.33 - 2,000,000 = 62,759.07 Since the NPV at 11% is still positive, the IRR is slightly higher than 11%. We can approximate that the IRR is around 11.5%. Part 3: Payback Period The payback period is the time it takes for the initial investment to be recovered from the cash flows. Payback Period Initial Investment Payback Period Annual Cash Flow 2,000,000 400,000 = 5 years Part 4: Simple Rate of Return The simple rate of return is calculated as: Simple Rate of Return - Annual Incremental Net Operating Income Simple Rate of Return= 200.000 2,000,000 Initial Investment = 0.10 or 10% Summary • Net Present Value (NPV): $133,970.77 • Internal Rate of Return (IRR): Approximately 11.5% • Payback Period: 5 years • Simple Rate of Return: 10%

0== (1+IRR) 400,000 - 2,000,000 This is generally solved using financial calculators or software, but for the sake of approximation, we can start with our known NPV formula and trial and error around the given discount rate of 10%. Given the positive NPV at 10%, the IRR will be slightly higher than 10%. By trying 11%: 400,000 Year 1: (1+0.11) 400,000 1.11 360, 360.36 Year 2: 400,000 400,000 324, 782.08 (1+0.11) 1.2321 400,000 400,000 Year 3: (1+0.11) 1.36763 296, 197.37 400,000 400,000 Year 4: (1+0.11)4 1.51808 263, 894.00 400,000 400,000 Year 5: (1+0.11)5 1.68506 237,298.20 Year 6: 400,000 400,000 214,206.49 (1+0.11)6 1.87042 Year 7: 400,000 400,000 (1+0.11)" 2.07616 = 192, 702.24 400,000 Year 8: 400,000 173,318.33 (1+0.11) 2.30454 Adding these present values together: \text{NPV at 11%} = 360,360.36 + 324,782.08 + 296,197.37 +263,894.00 + 237,298.20 + 214,206.49 + 192,702.24 + 173,318.33 - 2,000,000 = 62,759.07 Since the NPV at 11% is still positive, the IRR is slightly higher than 11%. We can approximate that the IRR is around 11.5%. Part 3: Payback Period The payback period is the time it takes for the initial investment to be recovered from the cash flows. Payback Period Initial Investment Payback Period Annual Cash Flow 2,000,000 400,000 = 5 years Part 4: Simple Rate of Return The simple rate of return is calculated as: Simple Rate of Return - Annual Incremental Net Operating Income Simple Rate of Return= 200.000 2,000,000 Initial Investment = 0.10 or 10% Summary • Net Present Value (NPV): $133,970.77 • Internal Rate of Return (IRR): Approximately 11.5% • Payback Period: 5 years • Simple Rate of Return: 10%

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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0== (1+IRR) 400,000 - 2,000,000 This is generally solved using financial calculators or software, but for the sake of approximation, we can start with our known NPV formula and trial and error around the given discount rate of 10%. Given the positive NPV at 10%, the IRR will be slightly higher than 10%. By trying 11%: 400,000 Year 1: (1+0.11) 400,000 1.11 360, 360.36 Year 2: 400,000 400,000 324, 782.08 (1+0.11) 1.2321 400,000 400,000 Year 3: (1+0.11) 1.36763 296, 197.37 400,000 400,000 Year 4: (1+0.11)4 1.51808 263, 894.00 400,000 400,000 Year 5: (1+0.11)5 1.68506 237,298.20 Year 6: 400,000 400,000 214,206.49 (1+0.11)6 1.87042 Year 7: 400,000 400,000 (1+0.11)" 2.07616 = 192, 702.24 400,000 Year 8: 400,000 173,318.33 (1+0.11) 2.30454 Adding these present values together: \text{NPV at 11%} = 360,360.36 + 324,782.08 + 296,197.37 +263,894.00 + 237,298.20 + 214,206.49 + 192,702.24 + 173,318.33 - 2,000,000 = 62,759.07 Since the NPV at 11% is still positive, the IRR is slightly higher than 11%. We can approximate that the IRR is around 11.5%.
Transcribed Image Text:0== (1+IRR) 400,000 - 2,000,000 This is generally solved using financial calculators or software, but for the sake of approximation, we can start with our known NPV formula and trial and error around the given discount rate of 10%. Given the positive NPV at 10%, the IRR will be slightly higher than 10%. By trying 11%: 400,000 Year 1: (1+0.11) 400,000 1.11 360, 360.36 Year 2: 400,000 400,000 324, 782.08 (1+0.11) 1.2321 400,000 400,000 Year 3: (1+0.11) 1.36763 296, 197.37 400,000 400,000 Year 4: (1+0.11)4 1.51808 263, 894.00 400,000 400,000 Year 5: (1+0.11)5 1.68506 237,298.20 Year 6: 400,000 400,000 214,206.49 (1+0.11)6 1.87042 Year 7: 400,000 400,000 (1+0.11)" 2.07616 = 192, 702.24 400,000 Year 8: 400,000 173,318.33 (1+0.11) 2.30454 Adding these present values together: \text{NPV at 11%} = 360,360.36 + 324,782.08 + 296,197.37 +263,894.00 + 237,298.20 + 214,206.49 + 192,702.24 + 173,318.33 - 2,000,000 = 62,759.07 Since the NPV at 11% is still positive, the IRR is slightly higher than 11%. We can approximate that the IRR is around 11.5%.
Part 3: Payback Period The payback period is the time it takes for the initial investment to be recovered from the cash flows. Payback Period Initial Investment Payback Period Annual Cash Flow 2,000,000 400,000 = 5 years Part 4: Simple Rate of Return The simple rate of return is calculated as: Simple Rate of Return - Annual Incremental Net Operating Income Simple Rate of Return= 200.000 2,000,000 Initial Investment = 0.10 or 10% Summary • Net Present Value (NPV): $133,970.77 • Internal Rate of Return (IRR): Approximately 11.5% • Payback Period: 5 years • Simple Rate of Return: 10%
Transcribed Image Text:Part 3: Payback Period The payback period is the time it takes for the initial investment to be recovered from the cash flows. Payback Period Initial Investment Payback Period Annual Cash Flow 2,000,000 400,000 = 5 years Part 4: Simple Rate of Return The simple rate of return is calculated as: Simple Rate of Return - Annual Incremental Net Operating Income Simple Rate of Return= 200.000 2,000,000 Initial Investment = 0.10 or 10% Summary • Net Present Value (NPV): $133,970.77 • Internal Rate of Return (IRR): Approximately 11.5% • Payback Period: 5 years • Simple Rate of Return: 10%
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