(b) Compute the Internal Rate of Return (IRR) for the project to Upgrade Vehicles only, given that itfalls between 14% and 15%. The PV Factors are provided below:PV FactorsYear14%15%10.87720.869620.76950.756130.67500.657540.59210.5718 AEGHJKCash FlowsCumulative Cash FlowsGivenPV of Cash FlowsCum PV of Cash FlowsYearsUpgradePurchaseUpgradePurchasePV FactorUpgradePurchaseUpgradePurchase-10000000-6250000-10000000-62500001-10000000-6250000-10000000-6250000140000002500000-6000000-37500000.892935716002232250-6428400-4017750235000002500000-2500000-12500000.797227902001993000-3638200-20247503325000015000007500002500000.711823133501067700-1324850-957050430000001000000375000012500000.63551906500635500581650-321550FIGUpgradePurchasePB2.7692307691.166666667Discounted PB3.694912143 N/APV of inflows105816505928450PV of outflows100000006250000NPV581650-321550IRR15%9%1.0581650.948552Payback period, I Corp should select the option to upgrade as payback period of upgradeoption is lower than the purchase option.Dişcounted payback period, I Corp should select option to upgrade as discount paybackperiod of purchase option cannot be calculated as it is more than life of the project as thecumulative cash flows are negative till the last year of cash project.Net present value, I Corp should select option to upgrade as NPV of upgrade option ishigher than purchase option.Profitability index, I Corp should select option to upgrade as PI of upgrade option is morethan purchase option.

The IRR is the rate of return of the organisation where cash outflow matches with the…

Answered: (b) | bartleby

Business

Accounting

(b)

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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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

(b) Compute the Internal Rate of Return (IRR) for the project to Upgrade Vehicles only, given that it
falls between 14% and 15%. The PV Factors are provided below:
PV Factors
Year
14%
15%
1
0.8772
0.8696
2
0.7695
0.7561
3
0.6750
0.6575
4
0.5921
0.5718

A
E
G
H
J
K
Cash Flows
Cumulative Cash Flows
Given
PV of Cash Flows
Cum PV of Cash Flows
Years
Upgrade
Purchase
Upgrade
Purchase
PV Factor
Upgrade
Purchase
Upgrade
Purchase
-10000000
-6250000
-10000000
-6250000
1
-10000000
-6250000
-10000000
-6250000
1
4000000
2500000
-6000000
-3750000
0.8929
3571600
2232250
-6428400
-4017750
2
3500000
2500000
-2500000
-1250000
0.7972
2790200
1993000
-3638200
-2024750
3
3250000
1500000
750000
250000
0.7118
2313350
1067700
-1324850
-957050
4
3000000
1000000
3750000
1250000
0.6355
1906500
635500
581650
-321550
FIG
Upgrade
Purchase
PB
2.769230769
1.166666667
Discounted PB
3.694912143 N/A
PV of inflows
10581650
5928450
PV of outflows
10000000
6250000
NPV
581650
-321550
IRR
15%
9%
1.058165
0.948552
Payback period, I Corp should select the option to upgrade as payback period of upgrade
option is lower than the purchase option.
Dişcounted payback period, I Corp should select option to upgrade as discount payback
period of purchase option cannot be calculated as it is more than life of the project as the
cumulative cash flows are negative till the last year of cash project.
Net present value, I Corp should select option to upgrade as NPV of upgrade option is
higher than purchase option.
Profitability index, I Corp should select option to upgrade as PI of upgrade option is more
than purchase option.

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