Question

NPV and IRR   

Benson Designs has prepared the following estimates for a​ long-term project it is considering. The initial investment is ​$43,760​, and the project is expected to yield​ after-tax cash inflows of ​$7,000 per year for 10 years. The firm has a cost of capital of 14​%.

a.  Determine the net present value​ (NPV) for the project.

b.  Determine the internal rate of return​ (IRR) for the project.

c.  Would you recommend that the firm accept or reject the​ project?

Answer 1

Initial investment is 43760

Cash flows is 7000 for 10 years

Discount rate is 14%

Npv is present value of cashflows less initial investment

Npv = 7000(PVIFA 14% 10y) -43760

7000(5.2161) - 43760 = -7247

To calculate IRR we should calculate Npv at another discount rate @15

= 7000(PVIFA 15% 10y) -43760

= 7000(5.0188) -43760

= -8628.4

Formulas for IRR is

= Lower rate +[ NPV at lower rate / (NPV at lower rate - NPV at higher rate)] * ( Higher rate - Lowe rate)

= 14% +(-7247)/(-7247+8628.4)

= 14% -5.246%

= 8.753%

Project Should be rejected because Npv is negitive and IRR is less than discount rate