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Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and...

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Accounting

Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 peryear, with the first of the four equal investments payable todayupon acceptance of the project. Once in production the snowboard isexpected to produce annual cash flows of $200,000 each year for 10years. Boulderado's discount rate is 10%. The IRR for boulderado'ssnow board project is closest to : A. 10.4% B.10.0% C.11.0%D.15.1%

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4.2 Ratings (908 Votes)

IRR is that discount rate which gives 0 NPV.
The discount rate has to be found out by trial and error by trying different
discount rates to get 0 NPV.
Year Cash Outflow Cash Inflow Net Cash Flow PVIF at 10% PV at 10% PVIF at 11% PV at 11%
0 250000 0 -250000 1.00000 -250000 1.00000 -250000
1 250000 -250000 0.90909 -227273 0.90090 -225225
2 250000 -250000 0.82645 -206612 0.81162 -202906
3 250000 -250000 0.75131 -187829 0.73119 -182798
4 0 200000 200000 0.68301 136603 0.65873 131746
5 0 200000 200000 0.62092 124184 0.59345 118690
6 0 200000 200000 0.56447 112895 0.53464 106928
7 0 200000 200000 0.51316 102632 0.48166 96332
8 0 200000 200000 0.46651 93301 0.43393 86785
9 0 200000 200000 0.42410 84820 0.39092 78185
10 0 200000 200000 0.38554 77109 0.35218 70437
11 0 200000 200000 0.35049 70099 0.31728 63457
12 0 200000 200000 0.31863 63726 0.28584 57168
13 0 200000 200000 0.28966 57933 0.25751 51503
NPV 301588 302
For 0 NPV the discount rate should be close to 11%
Hence, IRR is closest to 11.00% =. Option [C]

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