Question

A project has the following cash flows:

Year	Cash Flow
0	$	72,500
1		–51,500
2		–28,000

What is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Internal rate of return             %

What is the NPV of this project if the required return is 6 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Net present value            $

What is the NPV of the project if the required return is 0 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Net present value            $

What is the NPV of the project if the required return is 21 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Net present value            $

Answer 1

This project is different as the cash flows pattern is reverse to what we generally encounter,

CFO = $72,500

CF1 = ($51,500)

CF2 =($28,000)

Compute IRR = 7.10% ( Rounded off to two decimal places)

alternatively,

$72,500 + ($51,500)/(1+ IRR) + ($28,000)/(1 +IRR)^2 = 0

IRR is the rate at which the NPV is zero,

CFO = $72,500

CF1 = ($51,500)

CF2 =($28,000)

Now, NPV at required return of 6% is ,

NPV = ($1004.81) ROUNDED OFF TO TWO DECIMAL PLACES,

Alternatively we can calculate,

72,500 + (51,500)/1.06 + ($28,000)/(1.06)^2

= ($1004.81)

Repeating the same procedure at 0%, the NPV is

=($7000)

Repeating the same procedure at required return of 21% we get,

NPV = $10813.64 (Rounded off to two decimal places)