Blossom Company is considering two capital investment proposals. Estimates regar
ID: 2585917 • Letter: B
Question
Blossom Company is considering two capital investment proposals. Estimates regarding each project are provided below: Initial investment Annual net income Net annual cash inflow Estimated useful life Salvage value ec $620000 58000 186000 5 years $820000 46000 161000 6 years The company requires a 10% rate of return on all new investments. Periods 9% 10% 11% 12% 3.890 3.7913.696 3.605 4.486 4.355 4.231 4.111 The internal rate of return for Project Nuts is approximately 3.9% 4.9% 1.9% 2.9%Explanation / Answer
Project Soup Project Nuts 1 Initial Investment 620,000 820,000 2 Annual Net Income 58,000 46,000 3 Net Annual Cash Inflow 186,000 161,000 4 Estimated Usefull Life 5 Years 6 Years 5 Salvage Value - - 6 Present Value Annuity is 3.791 4.355 7 Total Present Cash Inflow 705,126 701,155 8 Net Present Value 85,126 (118,845) At IRR Net Present Value equals to Zero , hence equate the NPV of the Project Nuts , and take Rate as 'r' ==> Present Value Annuity 'r' for 6 Years =820000/161000 ==> Present Value Annuity 'r' for 6 Years = 5.09 ==> r =4.9% Just Find out the Value of the IRR @ r=4.9% Present Annuity will be 5.09 for 6 years period .