what is the incremental return from renovating?

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21. An investor is considering renovating a building. The total cost of renovation is expected to be $100,000, of which 75% can be borrowed. Given the after-tax cash flows to the equity investor as showed below, what is the incremental return from renovating?

1       2    3    4          5
ATCF after renovation 9,200 10,000 12,000 14,000 316,000
ATCF-no renovation 10,000 10,200 10,440 10,680 160,900

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nswer: incremental return from renovating =9.75%

Working notes for the above answer is as under

Year ACTF After
Renovation
ACTF No Renovation Incremental
Cash Flow
Renovation Exp Net Flow
0 -100,000 -100,000
1 9200 10,000 -800 -800
2 10000 10200 -200 -200
3 12000 10440 1,560 1,560
4 14000 10680 3,320 3,320
5 316000 160900 155,100 155,100

Let us find IRR by trial and error Mehod as follow

IRR= -100000 + -800(1+i)1+ -200(1+i)2+ 1560(1+i)3+ 3320(1+i)4+ 155100(1+i)5

= 9.75%

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