Question

It costs $10,000 to replace the old broken windows with brand new energy efficient windows. This project would save a home owner $1,000 per year – the home owner plans to live in the house for more than 10 years. Which statement(s) are absolutely true:

the project has a positive Net Present Value |
||

the project breaks even in 10 years |
||

the project has a negative Net Present Value |
||

the Internal Rate of Return is positive |
||

the Net Present Value of the project depends on the choice of the “discount rate” |

Answer #1

Cost of replacement = $10,000

Saving per year = $1,000

savings value is more than cost of replacement such that Internal rate of return is always positive. Cash Inflows are more than Cash Outflows

Net present value of the project always depends on the discount rate as present value of inflows discounted back to year 0 with discount rate

The below statements are absolutely true in all cases

> the internal rate of return is positive

> the Net present Value of the project depends on the choice of the discount rate

Remaining statements are true only in some cases.

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