Compute the actual internal rate of return

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Reference no: EM131375457

Refer to given Problem. Before it purchases sonar warning devices to help trucks back up at store loading docks, St. James department store is re-examining the original estimates of two types of annual savings generated by installing the devices. St. James feels that the original estimates were somewhat optimistic, and they want to include probability information in their analysis. The table below shows their revised estimates, with probability distributions, of annual savings from faster turnaround time and reduced damage to the loading docks. The sonar system costs £220 000 and has a life of four years and a scrap value of £20 000. Carry out a Monte Carlo simulation and generate 100 random samples of the present worth of investing in the sonar system. Assume that St. James's MARR is 18% and ignore the inflation. Make a recommendation regarding the possible purchase based on the frequency distribution.

Savings from Faster Turnaround	Probability	Savings From Reduced Damage	Probability
£38,000	0.2	£24,000	0.25
41,000	0.2	26,000	0.25
44,000	0.2	28,000	0.25
47,000	0.2	30,000	0.25
50,000	0.2

Problem :
Sonar warning devices are being purchased by the St. James department store chain to help trucks back up at store loading docks. Tbe total cost of purchase and installation is £220 000. There are two types of saving from the system. Faster turnaround time at the congested loading docks will save £50 000 per year in today's pounds. Reduced damage to the loading docks will save £30 000 per year in today's pounds. St. James has an observed actual pound MARR of 18%. The sonar system has a life of four years. Its scrap value in today's pounds is £20 000. The inflation rate is expected to be 6% per year over the next four years.

(a) Wha t is St. James's real MARR?

(b) What is the real internal rate of return? (This is most easily done with a spreadsheet.)

(d) Compute the actual internal rate of return from the actual pound cash flows. (This is most easily done with a spreadsheet.)

(e) Wha t is the present worth of the system?

Equation:

IRR_A = IRRR +/+ IRR_Rxf

Reference no: EM131375457

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