Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,550,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10years, the estimated useful life of the product line. Estimated residual value for Plan B is$1,200,000. Division D uses straight-line depreciation and requires an annual return of 9%. Calculate the IRR of Plan A and B.
Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,550,000. Expected annual net cash inflows are $1,625,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,000,000. This plan is expected to generate net cash inflows of $1,090,000 per year for 10years, the estimated useful life of the product line. Estimated residual value for Plan B is$1,200,000. Division D uses straight-line depreciation and requires an annual return of 9%. Calculate the IRR of Plan A and B.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Division D is considering two possible
expansion plans. Plan A would expand a
current product line at a cost of
$8,550,000. Expected annual net cash
inflows are$1,625,000, with zero residual
value at the end of 10 years. Under Plan B,
Division D would begin producing a new
product at a cost of $8,000,000. This plan
is expected to generate net cash inflows of
$1,090,000 per year for 10years, the
estimated useful life of the product line.
Estimated residual value for Plan B
is$1,200,000. Division D uses straight-line
depreciation and requires an annual return
of 9%.
Calculate the IRR of Plan A and B.
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VIEWStep 2: Computation of NPV of plan A if discount rate is 9 %
VIEWStep 3: Computation of NPV of plan A if discount rate is 20%
VIEWStep 4: Computation of IRR of plan A.
VIEWStep 5: Computation of NPV of plan B if discount rate is 9 %
VIEWStep 6: Computation of NPV of plan B if discount rate is 5 %
VIEWStep 7: Computation of IRR of plan B.
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