Ford Motor Company is considering producing a new extremely limited-edition vers

Question

Ford Motor Company is considering producing a new extremely limited-edition version of the Mustang.  The initial costs associated with retooling a manufacturing plant, redesign, initial marketing, raw materials and other costs would be $6 million at the present time.

The project is expected to generate only one cash flow of $18 million. Given the complexity of the project, the cars will not be ready until 4 years from now.

Ford estimates that shareholders will require to earn 19 percent on investments such as this.

Part 1. Calculate the internal rate of return on the investment. percent

Place your answer in percentage form with at least two decimal places of accuracy and without the percentage sign.  For example, if your intended answer is two point seven two percent, then place your answer as 2.72

Part 2. Based upon the IRR decision rule, should the company invest in the Mustang? (Yes or No)

Explanation / Answer

Part 1

for IRR, NPV =0

-6 + 18/(1+IRR)^4 =0

IRR =31.61

Part2

Yes

Reason- internal rate of return is greater than required rate of return

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