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BackInSoon, Inc., has estimated that a proposed project's 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the tenth year. Assuming that these cash inflows satisfy exactly BackInSoon's required rate of return of 8 percent, calculate the initial cash outlay. (Hint: With a desired IRR of 8%, use the IRR formula: ICO = discounted cash flows.)
Suggested Answer: B
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12 comments · newest first
EL
Eleni
1 month ago
I’m leaning towards C) $25,000. The terminal benefit makes it higher than expected.
AL
Alfreda
1 month ago
I feel like B) $19,090 could be right. The cash flows seem to add up to that.
TE
Teddy
1 month ago
This question is tricky! I think the answer is A) $16,775.
RA
Raymon
2 months ago
Terminal benefit of $5,000 at year 10 is interesting!
LI
Lilli
2 months ago
Definitely going with option B, seems right to me!
EV
Eva
2 months ago
Wait, how can the outlay be that high? Sounds off.
DE
Deane
2 months ago
I think the initial cash outlay is closer to $19,090.
AN
Angella
2 months ago
The annual cash benefit is $2,500 for 10 years.
EM
Emilio
2 months ago
I feel like I practiced this kind of problem before, and I think the initial cash outlay is usually lower than the total cash inflows. Maybe it's option A?
LU
Luisa
3 months ago
If I remember right, we should discount the annual cash benefits and the terminal benefit back to present value using the 8% rate. I think the answer might be around $19,090, but I need to double-check my math.
NI
Nidia
3 months ago
I remember a similar question where we had to discount cash flows, but I can't recall if we should include the terminal benefit in the same calculation or treat it separately.
AL
Alaine
3 months ago
I think we need to calculate the present value of the cash flows first, but I'm not entirely sure how to apply the IRR formula correctly.