Question

NPV and IRR???Benson Designs has prepared the following estimates for a? long-term project it is considering. The initial investment is ?$46,760?, and the project is expected to yield? after-tax cash inflows of ?$5,000 per year for 14 years. The firm has a cost of capital of 9?%.

a.??Determine the net present value? (NPV) for the project.

b.??Determine the internal rate of return? (IRR) for the project.

c.??Would you recommend that the firm accept or reject the? project?

Answer 1

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

=$5000[1-(1.09)^-14]/0.09

=$5000*7.786150389

=$38930.75

NPV=Present value of inflows-Present value of outflows

=$38930.75-$46760

=($7829.25)(Approx)(Negative).

2.

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

46760=5000/1.0x+5000/1.0x^2+...........................+5000/1.0x^14

Hence x=irr=5.90%(Approx).

3.Hence since NPV is negative and even irr is less than the cost of capital;the firm should reject the project.