What is the internal rate of return for proposal

Assignment Help Financial Management

Reference no: EM131972559

The ABC Company has gathered the following information about the cash flows associated with a capital budgeting opportunity. The project will cost $10,000,000 to implement, and has a three year estimated economic life.

There is a 50% probability that the economy will be average during the first year of the project, a 30% chance it will be better than average and a 20% chance it will be worse that average. If the economy is average for the first year, there is a 60% chance it will be average in year 2, a 30% chance it will be better than average and a 10% chance it will be below average. If the economy is above average during year 1, there is a 50% chance it will be above average during year 2, a 30% chance it will be average and a 20% chance it will be worse than average. If the economy is below average during the first year, there is a 40% chance it will be below average the second year, a 40% chance it will be average, and a 20% chance it will be better than average.

If the economy is average for year 2, there is a 65% chance it will be average in year 3, a 30% chance it will be better than average and a 5% chance it will be below average. If the economy is above average during year 2, there is a 60% chance it will be above average during year 3, a 30% chance it will be average and a 10% chance it will be worse than average. If the economy is below average during the second year, there is a 50% chance it will be below average the third year, a 40% chance it will be average and a 10% chance it will be better than average.

If the economy is average during a year, the net cash flow for the year will be $4,000,000. If the economy is better than average during a year, the net cash flow for the year will be $5,200,000 and if the economy during a year is worse than average, the net cash flow for the year will be $3,100,000.

What are the annual net cash flows that should be used to evaluate the opportunity?

What is the internal rate of return for the proposal?

Reference no: EM131972559

Questions Cloud

Preferred stock in the computation of omg wacc : What weight should you use to preferred stock in the computation of OMG's WACC?

Which bond will have lower yield to maturity and why : Bond A is a municipal bond and Bond B is a investment grade corporate bond. Which bond will have lower yield to maturity (YTM) and why?

Your money should you invest in risky portfolio : If you want your complete portfolio to have a standard deviation of 7%, what percentage of your money should you invest in the risky portfolio?

Finance manager goals and primary responsibilities : What is/are the Finance manager’s goals and primary responsibilities? Describe the maneger’s conflict that is explained in the “Agency conflict”

What is the internal rate of return for proposal : What are the annual net cash flows that should be used to evaluate the opportunity? What is the internal rate of return for the proposal?

Create portfolio from risky asset : Mike wants to create a portfolio from a risky asset with an expected rate of return of 11.5%

Considering building plant for initial investment : What is the NPV of the project and should Acme wait one year? Acme Industries is considering building a plant for an initial investment of $100 million

What weight should you use to preferred stock : What weight should you use to preferred stock in the computation of OMG's WACC?

Tax law changes from the recent tax law passed : List 3 tax law changes from the recent tax law passed that will have the greatest effect on corporations and explain.

User Account

All Pages