1.34 Quadratic Practice Problems
Practice Problems:
Students will be asked in class to solve the following problems. Work in teams. Some space is provided here to work. (Solutions are not provided.)
Problem #1
| Year | 0 | 1 | 2 |
| FCF | ($500) | $2,200 | ($1,400) |
(- 500) / (1 + IRR) 0 + (2,200 / (1 + IRR) 1 – (1,400 / (1 + IRR) 2 = 500 x2 – 2,200 x + 1,400
Here, you must employ the Quadratic formula.
X1 = 0.7717 IRR1 = 0.7717 – 1 = (0.23)
X2 = 3.6283 IRR2 = 3.6283 – 1 = 2.62, i.e., 262%
Problem #2
| Year | 0 | 1 | 2 |
| FCF | ($1,000) | $6,300 | ($4,400) |
(- 1,000) / (1 + IRR) 0 + (6,300 / (1 + IRR)1 + (- 4,400 / (1 + IRR)2 = 1,000 x2 – 6,300 x +4,400
X1 = 5.5 IRR1 = 5.5 – 1 = 4.5, i.e., 450%
X2 = 0.8 IRR2 = 0.8 – 1 = (0.20)
Problem #3
| Year | 0 | 1 | 2 |
| FCF | ($800) | $4,600 | ($3,650) |
(- 800) / (1 + IRR) 0 + (4,600 / (1 + IRR)1 + (- 3,650 / (1 + IRR)2 = 800 x2 – 4,600 x + (-3,650)
X1 = 4.80 IRR1 = 4.80 – 1 = 3.8, i.e., 380%
X2 = 0.95 IRR2 = 0.95 – 1 = (0.05)
