Question

You are evaluating a project that will require an initial investment of $200. Over the next...

You are evaluating a project that will require an initial investment of $200. Over the next four years, the project is expected to generate after-tax cash flows of 40, 50, 60, 70. If 8% is your appropriate discount rate, what is the NPV and IRR of this project?

Choices:

21.02, 9.20%

33.67, 10.03%

41.55, 11.88%

-10.55, 6.65%

-21.02, 3.58%

Homework Answers

Answer #1
Calculation of NPV
Year Cash flow 8% Discounted factor Discounted cash flows
1 40 0.926 (40*0.926) 37.04
2 50 0.857 (50*.0.857) 42.87
3 60 0.794 (60*0.794) 47.63
4 70 0.735 (70*0.735) 51.45
(1) 178.99
Initial Investment (2) 200
NPV (1-2) (178.99 - 200) -21.02

Discounting factor is computed by following formula-

=(1+8%)^-1

=0.926

Similarly for all years by changing powers to -2, -3 and -4.

Then, discounted cash flows are arrived by multiplying cash flows with discounting factor,

=40 * 0.926

=37.40

Similarly for all years.

Calculation of IRR
IRR
Year Cash flows
0 -200
1 40
2 50
3 60
4 70
IRR 3.58%

IRR is calculated by applying IRR function in excel.

Thus, option D is selected as NPV is -21.02 and IRR is 3.58 %.

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