Your firm is scheduled to spend $500,000 on one-time repairs at t
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Your firm is scheduled to spend $500,000 on one-time repairs at t

Question 3: Internal Rate of Return

Your firm is scheduled to spend $500,000 on one-time repairs at t=0. Due to cash flow problems, your firm is considering forgoing these repairs. If you do, you expect you will need to spend $700,000 at t=1 on new equipment (i.e., you save $500,000 at t=0 but you need to spend $700,000 at t=1). Compute the IRR for this problem. For what range of cost of capital is forgoing repairs at t=0 a good decision?

Hint
Accounts & FinanceCash flow is the net balance of money coming into and going out of a firm at a particular moment in time. A firm continuously has cash coming in and going out. For instance, money leaves the company and goes to its suppliers when a retailer buys inventory....
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