Gd.33. The trustees of the Danube School of Art and Music, located in Tuttlingen, Germany, are considering a major overhaul of theschool's audio system. With or without the overhaul, the system will be replaced in two years. If an overhaul is done now, thetrustees expect to save the following repair costs during the next two years: year 1, 4,000 euros; year 2, 6,000 euros. Theoverhaul will cost 7,906 euros. (The euro is used in most European markets.)Use Appendix A for your reference.Note: Use appropriate factor(s) from the tables provided.Required:Use trial and error to compute the internal rate of return on the proposed overhaul. (Hint: The NPV of the overhaulan 12 percent discount rate is used, but the NPV is negative if a 20 percent rate is used.)Internal rate of returnpositive if

The IRR is the rate of return at which the NPV is zero. It is the break even rate of return.

Answered: The trustees of the Danube School of…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 14P

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The trustees of the Danube School of Art and Music, located in Tuttlingen, Germany, are considering a major overhaul of the school's audio system. With or without the overhaul, the system will be replaced in two years. If an overhaul is done now, the trustees expect to save the following repair costs during the next two years: year 1, 3,900 euros; year 2, 5,900 euros. The overhaul will cost 7,957 euros. (The euro is used in most European markets.) Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: Use trial and error to compute the internal rate of return on the proposed overhaul. (Hint: The NPV of the overhaul is positive if an 10 percent discount rate is used, but the NPV is negative if a 18 percent rate is used.) > Answer is complete but not entirely correct. Internal rate of return 22 X %
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