Singular Construction is evaluating whether to build a new distribution facility
ID: 2739485 • Letter: S
Question
Singular Construction is evaluating whether to build a new distribution facility. The proposed investment will cost Singular $4 million to construct and provide cash savings of $500,000 per year over the next 10 years.
1. What rate of return does the investment offer
2.If Singular were to invest another $200,000 in the facility at the end of 5 years, it would extend the life of the project for 4 years, during which time it would continue receiving cash savings of $500,000. What is the internal rate of return for this investment?
Need breakdown of formula nad solution, thank you
Explanation / Answer
1
2
Below is the table of calculations: I have done these calculations using the internal rate of return approx as 7.94%. This can be done by using the formula mentioned above. I prefer calculating in excel and this proves to be the easiest way to arrive at the solution. Please note that at the end of year 5 there is an investment of 200,000 so the net cash flow = 500000-200000 = 300000
Rate the investment is offering = 500000 / 4000000 12.50%