Question

(1)A firm undertakes a five-year project that requires an initial capital investment of $100,000. The project is then expected to provide cash flow of $12,000 per year for the first two years, $50,000 in the third and fourth years, and $10,000 in the fifth year. The project has an end-of-life salvage value of $5,000. If the discount rate applied to these cash flows is 9.50 percent, to the nearest dollar, the net present value of this project is _____?

(2)The internal rate of return (rounded to two decimal places as a percent) for the project described in the last problem is ___

Answer 1

1) Net Present Value = Present Value of cash Inflows - Present Value of cash Outflows

= [ 12000*1/(1.095)^1+12000*1/(1.095)^2+50000*1/(1.095)^3+50000*1/(1.095)^4+10000*1/(1.095)^5+5000*1/(1.095)^5]-100000

= $ 3356.857938

Answer = $ 3,356.86

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2)

Let the IRR be x.

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

100,000 = 12000 /(1.0x) +12000/ (1.0x)^2 +50000 /(1.0x)^3+ 50000 /(1.0x)^4+10000 /(1.0x)^5+5000 /(1.0x)^5

Or x= 10.634%

Hence the IRR is 10.63%