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Problem 9.10.1
Years
Expected cash flow
Cash flow (w/ delay)
0
$500,000
$500,000
1
$200,000
0
2
$200,000
?
3
$200,000
?
4
$200,000
?
5
$200,000
?
Determine the Additional aftertax cash flow that will be needed to maintain the same IRR
with the cash flow that has no delay occurred.
1. Find the IRR for expected cash flow:
NPW(without delay) = $500,000 + $200,000(P/A,i,5) = 0
Trialand error method: let NPW = 25% and 30%
NPW (25%) = $500,000 + $200,000(P/A, 25%, 5) = $37,856
NPW (30%) = $500,000 + $200,000(P/A, 30%, 5) = $12,886.05
Using linear interpolation, i = 25% + 5% [37856 / (37856 + 12866.05)]
=
28.65%
(This answer is verified using excel function = 28.65%)
2. By using iteration, find the additional cash flow to maintain the same IRR = 28.65%
Additional cash flow with increment of $20,000. (Compute the IRR using excel function)
Annual Return (n = 2 to 5 years)
IRR
220,000
18.11
240,000
21.29
260,000
24.32
280,000
27.21
300,000
29.99
We Notice that the IRR of 28.65 is between annuity of $280,000 and $300,000. Therefore we
find the annuity amount using linear interpolation.
($300,000  X) / (29.9928.65) =
(X  $280,000) / (28.6527.21)
2.075X = 1.075(300,000) + 280,000
X = $290,250
Therefore the additional amount of $90,250 or annuities of $290,250 are required each
year (from 2
nd
to 5
th
year) in order to have the same IRR rate of 28.65%
This can be verified by determine its NPW value at 28.65%
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This note was uploaded on 05/12/2010 for the course BUSINESS BS515 taught by Professor Johnson during the Fall '09 term at Drexel.
 Fall '09
 Johnson
 Economics

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