A whisky manufacturer has just completed a production run of 10000 barrels of whisky at a unit production cost of £400 per barrel. The whisky must be matured for 5 years before it can be sold and this will impose storage costs of £10 at the end of each of the next 5 years.
Bottling and labelling a mature barrel of whisky will cost £4 per barrel.
The current selling price of a barrel of this whisky is £500, but this is expected to increase, on average, by 10% per annum in each of the next 5 years.
Calculate the internal rate of return of this investment, and decide whether it is worthwhile if the current market rate of interest is 11% per annum.