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(b)

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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(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
Transcribed Image Text:(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.
Transcribed Image Text: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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