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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method, internal rate of return method, and analysis

The management of 1-leckel Communications Inc. is considering two capital investmentprojects. The estimated net cash flows from each project are as follows:

The radio station requires an investment of $1,598800, while the TV station requiresan investment of $3,401,440. No residual value is expected from either project.

Instructions

Determine the internal rate of return for each project using the present value of an annuityof $1 table in Exhibit 5.

To determine

Concept Introduction:

IRR:

Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.

To Calculate:

The Internal Rate of return for each project

Explanation

The Internal Rate of return for each project is calculated as follows:

    Radio Station
    Cash FlowsAmount
    Year 0 $ (1,598,800)
    Year 1 $ 560,000
    Year 2 $ 560,000
    Year 3 $ 560,000
    Year 4 $ 560,000
    IRR = 15...

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