Question

NPV and IRR: Equal Annual Net Cash Inflows
Winter Fun Company is evaluating a capital expenditure proposal that requires an initial investment of $68,168, has predicted cash inflows of $14,000 per year for seven years, and has no salvage value.

a. Using a discounted rate of 14 percent, determine the net present value of the investment proposal.

Use a negative sign with your answer, if appropriate.
$Answer

b. Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.)

Round to the nearest percent. (Example: 0.1568 = 16%)
Answer

%

c. What discount rate would produce a net present value of zero?
Answer

%

Answer 1

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$14000[1-(1.14)^-7]/0.14

=$14000*4.288304839

=$60036.27

1.NPV=Present value of inflows-Present value of outflows

=$60036.27-$68168

=($8131.73)(Approx)(Negative).

2.Let irr be x%
At irr,present value of inflows=present value of outflows.

68168=14000/1.0x+14000/1.0x^2+.............+14000/1.0x^7

68168=14000[1/1.0x+1/1.0x^2+............+1/1.0x^7]

[1/1.0x+1/1.0x^2+............+1/1.0x^7]=(68168/14000)

=4.869(Approx)

Hence x=irr=10%(Approx)(Also looking at present value of annuity factor(10%,7 years)also].

c.At irr;NPV=0

Hence discount rate=10%.