Question Three (10 Marks)
XYZ Corporation is considering investing in a highly volatile project in the tech industry. The project involves developing a new software product whose initial investment is KES 2,000,000. However, due to the unpredictable nature of the industry, there is considerable uncertainty regarding the cash flow projections. XYZ Corporation estimates three possible scenarios for the project's cash flows:
Scenario 1 (Optimistic):
• Year 1: KES 400,000
• Year 2: KES 800,000
• Year 3: KES 1,200,000
• Year 4: KES 1,600,000
• Year 5: KES 2,000,000
Scenario 2 (Expected):
Year 1: KES 300,000
Year 2: KES 600,000
Year 3: KES 900,000
Year 4: KES 1,200,000
Year 5: KES 1,500,000
Scenario 3 (Pessimistic):
• Year 1: KES 200,000
• Year 2: KES 400,000
• Year 3: KES 600,000
• Year 4: KES 800,000
• Year 5: KES 1,000,000
Required:
Calculate the Internal Rate of Return (IRR) for each of the three scenarios. (10 marks)
