I'm struggling with the area "indicate how the internal rate of return is calculated using the factor arrived at above." It needs to be answered with an equation/ formula that results in a percentage. I'm asking for help with the equation please, to show how to calculate the IRR. Thank you.
I'm struggling with the area "indicate how the internal rate of return is calculated using the factor arrived at above." It needs to be answered with an equation/ formula that results in a percentage. I'm asking for help with the equation please, to show how to calculate the IRR. Thank you.
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
Problem 1PS
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I'm struggling with the area "indicate how the
![### Internal Rate of Return Calculation for Remodeling Project
#### Assuming a Six-Year Time Horizon
This educational exercise guides on calculating the internal rate of return (IRR) of a remodeling project using both present value factors and Excel's IRR function.
#### Annual Cash Flow Calculation:
- **Revenue:** $110,000.00
- **Less Costs:**
- Other than depreciation: $10,000.00
- Depreciation: $58,333.00
- **Income before Taxes:** $41,667.00
- **Income Tax Expense:** $8,333.00
- **Net Income:** $33,333.33
- **Add Depreciation:** $58,333.00
- **Cash Flow:** $91,667.00
#### Present Value Factor:
- **Calculation:**
\[
\text{Present Value Factor} = \frac{\$350,000}{\$91,667} = 3.82
\]
This factor indicates how the internal rate of return is calculated.
### Explanation:
The annual cash flow includes revenue and deductions for costs and depreciation, leading to a net income that is adjusted by adding back the depreciation.
The present value factor is calculated by dividing the initial investment ($350,000) by the annual cash flow ($91,667), resulting in a factor of 3.82. This factor is used to determine the IRR, which measures the profitability of the project over a six-year period.
In a practical scenario, Excel’s IRR function can provide a precise IRR by considering all periods' cash flows.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4fc04862-5813-4b4f-893b-efba24448b50%2F58b90b6d-7a10-43fc-8fc2-a9fe7784ee54%2Fg12cs1u_processed.png&w=3840&q=75)
Transcribed Image Text:### Internal Rate of Return Calculation for Remodeling Project
#### Assuming a Six-Year Time Horizon
This educational exercise guides on calculating the internal rate of return (IRR) of a remodeling project using both present value factors and Excel's IRR function.
#### Annual Cash Flow Calculation:
- **Revenue:** $110,000.00
- **Less Costs:**
- Other than depreciation: $10,000.00
- Depreciation: $58,333.00
- **Income before Taxes:** $41,667.00
- **Income Tax Expense:** $8,333.00
- **Net Income:** $33,333.33
- **Add Depreciation:** $58,333.00
- **Cash Flow:** $91,667.00
#### Present Value Factor:
- **Calculation:**
\[
\text{Present Value Factor} = \frac{\$350,000}{\$91,667} = 3.82
\]
This factor indicates how the internal rate of return is calculated.
### Explanation:
The annual cash flow includes revenue and deductions for costs and depreciation, leading to a net income that is adjusted by adding back the depreciation.
The present value factor is calculated by dividing the initial investment ($350,000) by the annual cash flow ($91,667), resulting in a factor of 3.82. This factor is used to determine the IRR, which measures the profitability of the project over a six-year period.
In a practical scenario, Excel’s IRR function can provide a precise IRR by considering all periods' cash flows.
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