Question

NPV and IRR: Equal Annual Net Cash Inflows
Winter Fun Company is evaluating a capital expenditure proposal that requires an initial investment of $61,256, has predicted cash inflows of $13,000 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

(a) Calculation of NPV at 14%

NPV = - $61,256 + $13,000(PVAF 14%, 7 Years)

        = - $61,256 + ($13,000 x 4.2883)

          = - $61,256 + $55748

NPV = - $5,508 (Negative)

(b) Calculation of Internal Rate of Return

ANSWER =11%

Discount the Cash flow at lower rate Say 11%

Determine the NPV at Lower rate@11%

NPV = - $61,256 + $13,000(PVAF 11%, 7 Years)

        = - $61,256 + ($13,000 x 4.712)

          = - $61,256 + $61,256

NPV = Zero

Internal Rate of return is rate at which NPV Will be Zero, Therefore in this case

Internal Rate of Return = 11%

(c) Discount rate that would produce a net present value of zero will be 11%