Question

The cost of capital is 10% or project XYZ with the following characteristics:

	Initial Investment	Abandonment
Year	& Operating Cash Flows	Value in year t
0	($4,800)	$4,800
1	$2,000	$3,000
2	$1,875	$1,900
3	$1,750	$0

Assuming fulfillment of its potential life, what is the project's NPV and IRR?

a -$300 and 4.17%

b	$417 amd 2.35%

c	$831 and 9.31%

d	-$117 and 8.57%

Answer 1

If the project fulfils its potential life,

NPV = Present Value of Cash Inflows – Present Value of Cash Outflows

Year	Cash Flows	PVF@10%	PV
0	(4800)	1	(4800)
1	2000	0.909	1818
2	1875	0.826	1549.8
3	1750	0.751	1314.2
			(118)

IRR is the rate at which NPV = 0

NPV at 8.57%

Year	Cash Flows	[email protected]%	PV
0	(4800)	1	(4800)
1	2000	0.921	1842
2	1875	0.848	1590
3	1750	0.781	1368
		NPV	0

Hence, d is the answer