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NEW QUESTION: 1
Clay Industries, a diversified industrial firm, is considering investing into a new manufacturing facility which would allow the Company to expand its operations into a promising new market for industrial motors, specifically the High Temperature Superconducting, or HTS motors. This project is one of many currently under consideration for Clay Industries, and the amount of R&D expense allocated toward researching this new manufacturing facility is residual in nature. The following information applies to this new project.
R&D expense for the quarter $15,000
Initial cash outlay ($45,000)
t1: ($40,000)
t2: ($10,000)
t3: $40,000
t4: $40,000
t5: $16,000
t6: $25,000
Assuming no taxes and a $0.00 salvage value at t6, which of the following best represent the IRR for his project?
A. The IRR cannot be calculated due to the fact that the project has uneven cash flows
B. 7.039%
C. 2.639%
D. The IRR cannot be calculated due to the fact that no discount rate has been provided
E. This project will have multiple IRR at any discount rate
Answer: B
Explanation:
Explanation/Reference:
Explanation:
Remember that the quarterly R&D expense is a sunk cost, and one which cannot be directly attributable to this project. Because this quarterly R&D expense is not incremental in nature, it should be omitted from the IRR calculation. Additionally, the fact that this project has uneven cash flows is irrelevant for our calculation of IRR. To determine the IRR for this project, the following information is necessary: the initial investment outlay, the amount of each period's cash inflow, and the number of periods. In calculating IRR, no discount rate is necessary, so the last answer is incorrect. The calculation of the IRR is found as follows:
incorporate the initial investment outlay of ($45,000) as Cfo, for CO1=($40,000), CO2=($10,000), CO3=$40,000, CO4=$40,000, CO5=$16,000, CO6=$25,000, CPT IRR. This yields an IRR of 7.039%.

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Answer: C,E

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