Internal rate of return method to evaluate capital expend

Reference no: EM13244762

Plummer Chemicals employs the internal rate of return method to evaluate capital expenditure proposals. Plummer adjusts its acceptable rate of return to accommodate varying degrees of risk. The cash flow characteristics of a capital proposal required rate of return are presented below:

Coefficient of Variation of Cash Flow .10 to .15 Required Rate of Return .12
Coefficient of Variation of Cash Flow .16 to .35 Required Rate of Return .14
Coefficient of Variation of Cash Flow .36 to .50 Required Rate of Return .18
Coefficient of Variation of Cash Flow >.50 Required Rate of Return .24

Expected Cash Flows Each Year from Proposal for 10 years $400,000 Probability .20
Expected Cash Flows Each Year from Proposal for 10 years $600,000 Probability .40
Expected Cash Flows Each Year from Proposal for 10 years $800,000 Probability .30
Expected Cash Flows Each Year from Proposal for 10 years $900,000 Probability .10

The Capital expenditures proposal will require a cash investment of $3,000,000. Utilizing the internal rate of return method and the information above, should Plummer accept the proposal? Why?

Reference no: EM13244762

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