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Consider the following cash flows: Cash Flows ($) C0 C1 C2 −6,950 4,700 18,400 a. Calculate...

Consider the following cash flows: Cash Flows ($) C0 C1 C2 −6,950 4,700 18,400 a. Calculate the net present value of the above project for discount rates of 0, 50, and 100%. NPV @ 0% $ NPV @ 50% $ NPV @100% $ b. What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number.) IRR %

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Answer #1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

At 0%:

Present value of inflows=4700+18400

=$23100

NPV=Present value of inflows-Present value of outflows

=$23100-$6950

=$16150.

At 50%:

Present value of inflows=4700/1.5+18400/1.5^2

=$11311.11

NPV=Present value of inflows-Present value of outflows

=$11311.11-$6950

=$4361.11(Approx).

At 100%:

Present value of inflows=4700/2+18400/2^2

=$6950

NPV=Present value of inflows-Present value of outflows

=$6950-$6950

=0

Let irr be x%
At irr,present value of inflows=present value of outflows.

6950=4700/1.0x+18400/1.0x^2

Hence x=irr=100%.

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