1.34 Quadratic Practice Problems (40/92) -- Corporate Finance

1.34 Quadratic Practice Problems Practice Problems: 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)