Question

A project that provides annual cash flows of $20,500 for 7 years costs $82,000 today. a. If the required return is 10 percent, what is the NPV for this project?

Determine the IRR for this project.

Answer 1

Net present value = Present value of cash flows - Initial cost

Net present value = [$20,500 * PVAF(10% , 7 years)] - $82,000

Net present value = [$99,802.59 - $82,000]

Net present value = $17,802.59

Computation of IRR.

Discount rate @ 15%

Net present value = ($20,500 * 4.16042) - $82,000 = $3,288.605

Discount rate @ 17%

Net present value = ($20,500 * 3.92238) - $82,000 = - $1,591.21

By using Interpolation method.

IRR = Lower rate + [(NPV @ lower rate / Change in NPV) * Change in interest rates]

IRR = 15% + [($3,288.605 / $4,879.812) * 2%]

IRR = 16.33%