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) + (2,200 / (1 + IRR) 1 – (1,400 / (1 + IRR) = 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      IRR= 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

X= 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)

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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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