1. A Company is planning to implement a project involving an initial outlay of Rs. 50,000. The expected cash flows from the project are
Ind of Year Cash intlows (Rs.) 10,000 2 12.000 18,000 + 25,000 5 8.000 6 4,000 Calculate IRR Based on IRR, should this project be accepted if the cost of capital is 10%?
Answers
Answer:
In this case, the IRR is 56.77%. Given the assumption of a weighted average cost of capital (WACC) of 10%, the project adds value.
Explanation:
Keep in mind that the IRR is not the actual dollar value of the project, which is why we broke out the NPV calculation separately. Also, recall that the IRR assumes we can constantly reinvest and receive a return of 56.77%, which is unlikely. For this reason, we assumed incremental returns at the risk-free rate of 2%, giving us a MIRR of 33%.
The IRR helps managers determine which potential projects add value and are worth undertaking. The advantage of expressing project values as a rate is the clear hurdle it provides. As long as the financing cost is less than the rate of potential return, the project adds value.
To know more about the concept please go through the links:
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