User Account

All Pages

Calculating internal rate of return

Assignment Help Managerial Accounting
Reference no: EM13325576

Suppose you want to calculate the net present value for the following problem: You are considering an investment in a machine that costs $200,000 and the additional cash inflows (net income + depreciation) from the machine will be $80,000, $100,000, and $120,000 over the next three years. The firm's cost of capital is 16%.

Suppose you enter the data in an Excel spreadsheet as follows:

-200,000 in cell C1
80,000 in cell C2
100,000 in cell C3
120,000 in cell C4

To calculate the net present value, go to the Function Wizard. The function you are going to use is in the function category of FINANCIAL and is NPV. You will have to provide the following information:

For rate, enter the cost of capital, .16. For VALUE 1 enter the values that get discounted, C2:C4. Do not enter the initial cost (C1) since it does not get discounted. The value you will get from Excel for the above problem is 220,160.73. To get the net present value, you have to subtract the 200,000 (remember that adding a negative number is the same as subtracting) from the 220,160.73 and your answer is: 20,160.73.

To get the Profitability Index (PI), divide the present value of the inflows, 220,160.73 by the initial cost (200,000). The PI is 1.10. This means that every invested present value dollar yields $1.10 in present value inflows. If the net present value is positive, the PI is greater than 1.

Calculating Internal Rate of Return (IRR)

Go to the function wizard and get the function IRR. You will have to provide the following information:
VALUES: C1:C4
GUESS: .10

For Values, enter all the flows, including the cost. The cost should be a negative number.

For Guess, enter any value. If you do not want to guess, use .10. The reason you are asked to guess is because there may be several IRR's.

Make sure that you get the answer to two decimal places. You can get two decimal places by formatting the cells or by going to the menu bar and clicking on the "increase decimal" icon. The answer is 21.65%. If the IRR is greater than the cost of capital, you go ahead with the investment. Since 21.65% is greater than 16%, you invest in the machine.

Reference no: EM13325576

Questions Cloud

What is the instantaneous power due to that force : An initially stationary 1.3 kg object accelerates horizontally and uniformly to a speed of 17 m/s in 3.0 s. What is the instantaneous power due to that force
Determine how much energy is stored in the capacitor : A parallel-plate capacitor has plates with an area of 395 cm2 and an air-filled gap between the plates that is 2.29 mm thick. How much energy is stored in the capacitor
What would be the length of one edge of that cube : If this amount were shaped into a cube, what would be the length of one edge of that cube (in meters)
Explain monosubstituted benzene ring : Two isomeric compounds, A and B, are known to each have a monosubstituted benzene ring. Both have the formula C9H10O2 and both are insoluble in water. However, A dissolves in dilute aqueous NaOH, but B does not.
Calculating internal rate of return : Calculate the net present value, go to the Function Wizard. The function you are going to use is in the function category of FINANCIAL and is NPV and calculating Internal Rate of Return
What is her useful power output : Shoveling snow can be extremely taxing since the arms have such a low efficiency in this activity. What is her useful power output
Evaluate anacomps business new product development strategy : Evaluate Anacomp's business new product development strategy. What are the risks and benefits of this strategy for Anacomp's shareholders and how is Anacomp's accounting influenced by the way the company organizes and finances its new product devel..
Find how long does it take for the boat to cross the river : A 200-m-wide river flows due east at a uniform speed of 4.5m/s. A boat with a speed of 9.0m/s relative to the water leaves the south bank pointed in a direction 28o west of north. How long does it take for the boat to cross the river
Compute fraction of the energy was lost : One hockey puck of mass 0.2 kg strikes an identical stationary puck on a frictionless ice rink. what fraction of the energy was lost

Reviews

Write a Review

Managerial Accounting Questions & Answers

  Production at a level below maximum capacity

An examination of the accounting records of a fictitious business, the Clowney Company, disclosed a high contribution margin ratio and production at a level below maximum capacity.

  Discussion on product costing

Some firms have a lot of fixed costs and a few variable costs, while other firms are configured the other way around. What effect do you think the existence of a high proportion of fixed costs has on the desirability of using ABC methods?

  Question on segment reporting

Slatter Corp operates primarily in the United States. However, few years ago, it opened plan in Spain to produce merchandise to sell there. This foreign operation has been so successful that throughout the past 24 months the company started a manu..

  Prepare a new contribution format segmented income statement

Prepare a new contribution format segmented income statement for the month. Adjust the allocation of equipment depreciation and warehouse rent as indicated by the additional information provided.

  Knowledge-activity based costing

City of Joseph Commercial Bank hired consultants to compute the costs of three products: checking accounts, personal loans, and the Gold visa card. The consultant identified the following activities, costs and activity drivers (annual data):

  Compute the selling price of the bonds

Compute the selling price of the bonds under the three different options and indicate what option would be the best, and support your answer.

  Prepare journal entries for pike corp-oration

Prepare journal entries for Pike Corp-oration to account for its investment in Salmon Corporation for 2010 and 2011 and calculate the balance of Pike''s investment in Salmon at December 31, 2011.

  Traditional cost systems distort costs

Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.

  Why content of management report might influence activities

Management reports have been a prominent topic the past few years. The term "Management Reports" can be understood in a variety of different contexts and applications. A management report is also included in the annual report to shareholders.

  Determing production and direct material purchases

Alder Company budgets an annual basis. The following beginning and ending inventory levels (in units) are planned for the next year. Two units of raw material are required to produce each of finished products.

  The necessary jcumal dittoes to correct the errors

The necessary jcumal Dittoes to correct the errors and suspense Account duty balanced

  Variable manufacturing overhead

Variable manufacturing overhead costs $1,900,000 Fixed manufacturing overhead costs $1,600,000 Manufacturing overhead application base Expected Direct Labour hours

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd