Question

A project that provides annual cash flows of $2,900 for 10 years costs $15,300 today.

Required: (a) If the required return is 8 percent, what is the NPV for this project?

(b) Determine the IRR for this project.

Answer 1

a) Net Present Value = present Value of Cash Inflows - present Value of Cash Outflows

= $ 2,900 * 1/(1.08) ^ 1 +  $ 2,900 * 1/(1.08) ^ 2 +  $ 2,900 * 1/(1.08) ^ 3 +.... +  $ 2,900 * 1/(1.08) ^ 10 - $ 15,300

= $ 19,459.24- $ 15,300

= $ 4,159.24

Hence the correct answer is $ 4,159.24

b)

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

15,300= 2,900/(1.0x) + 2,900/ (1.0x)^2 + 2,900/ (1.0x)^3+…..+ 2,900/ (1.0x)^10

Or x= 13.709%

Hence the IRR is 13.71%