Question

A project that will last 10 years has a cash outflow of $10,000 at the beginning of the project and cash inflows of $5000 each year until the end of the project. If the required return is 8%, what is the NPV?

Select one:

a. $23,500

b. $23,550

c. $23,600

d. $23,650

e. None of the above.

Using the information in question #9, what is the IRR?

Select one:

a. About 20%

b. About 30%

c. About 40%

d. About 50%

Answer 1

1) b. $23,550

NPV = -Initial investment + Present value of cash flows

NPV = -$10,000 + $5000/1.08 + $5000/1.08^2 + $5000/1.08^3 + $5000/1.08^4 + $5000/1.08^5 + $5000/1.08^6 + $5000/1.08^7 + $5000/1.08^8 + $5000/1.08^9 + $5000/1.08^10

NPV = $23,550

2) d. About 50%

The IRR is the interest rate that makes the NPV of the project equal to zero. The IRR for this project is:

0 = -$12,000 + $5,000/(1 + IRR) + $5,000/(1 + IRR)^2 + $5,000/(1 + IRR)^3 + $5,000/(1 + IRR)^4 + $5,000/(1 + IRR)^5 + $5,000/(1 + IRR)^6 + $5,000/(1 + IRR)^7 + $5,000/(1 + IRR)^8 +$5,000/(1 + IRR)^9 + $5,000/(1 + IRR)^10

IRR = 49.08%