Question

The YayForWinterBreak Company wants to calculate the NPV and IRR on the following project:
Cost is $22,000 today, with end-of-year cash flows of $10,000, $10,000, and $6,500, Years 1 through 3 respectively for three years. Assume the cost of capital is 8%. SHOW ALL WORK on the TI BAII Plus Calculator FOR FULL CREDIT.
a) (8 pts) NPV?
b) (5 pts) IRR?

c) (2 pts) Do you accept or reject the project, and why?

Answer 1

Cash Flows:
Year 0 = -$22,000
Year 1 = $10,000
Year 2 = $10,000
Year 3 = $6,500

Answer a.

Cost of capital = 8%

NPV = -$22,000 + $10,000/1.08 + $10,000/1.08^2 + $6,500/1.08^3
NPV = $992.56

So, NPV of this project is $992.56

Answer b.

Let IRR be i%

NPV = -$22,000 + $10,000/(1+i) + $10,000/(1+i)^2 + $6,500/(1+i)^3
0 = -$22,000 + $10,000/(1+i) + $10,000/(1+i)^2 + $6,500/(1+i)^3

Using financial calculator, i = 10.66%

So, IRR of this project is 10.66%

Answer c.

NPV is positive