Course Coursehero-P10-15 Internal rate of return Peace of Mind, Inc. (PMI), sells...

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[FrostPhantom]

Question:​

P10-15 Internal rate of return Peace of Mind, Inc. (PMI), sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that arise. An analyst working for PMI is considering a warranty for a new line of big-screen TVs. A consumer who purchases the 2-year warranty will pay PMI $200. On average, the repair costs that PMI must cover will average $106 for each of the warranty's 2 years. If PMI has a cost of capital of 7%, should it offer this warranty for sale?

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Answer:​

Answer:

• Yes

Explanation:
An interest rate at which the present value of an investments cash inflows is equal to the present value cost of the investment is known as the internal rate of return.



Year Particulars Cash flows PVIF at 7% Present value



0 Initial cost 200 1 200



1 Year 1 cash inflows -106 (done on excel 2016)



2 Year 2 cash inflows -106 (done on excel 2016)



IRR 3.97%



NPV $8.35



The IRR and the NPV is 3.97% and $8.35 respectively, so it should be accepted as the NPV comes in a positive amount