Question

A project has annual cash flows of $6,500 for the next 10 years and then $8,500 each year for the following 10 years. The IRR of this 20-year project is 12.77%. If the firm's WACC is 8%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

Annual Cash Flow for first 10 years = $6,500
Annual Cash Flow for next 10 years = $8,500

Initial Investment = Present Value of Annual Cash Flow at IRR
Initial Investment = $6,500/1.1277 + $6,500/1.1277^2 + … + $6,500/1.1277^10 + $8,500/1.1277^11 + $8,500/1.1277^12 + … + $8,500/1.1277^20
Initial Investment = $6,500 * (1 - (1/1.1277)^10) / 0.1277 + $8,500 * (1/1.1277^10) * (1 - (1/1.1277)^10) / 0.1277
Initial Investment = $6,500 * 5.476491 + $8,500 * 1.646518
Initial Investment = $49,592.59

WACC = 8%

NPV = -$49,592.59 + $6,500/1.08 + $6,500/1.08^2 + … + $6,500/1.08^10 + $8,500/1.08^11 + $8,500/1.08^12 + … + $8,500/1.08^20
NPV = -$49,592.59 + $6,500 * (1 - (1/1.08)^10) / 0.08 + $8,500 * (1/1.08^10) * (1 - (1/1.08)^10) / 0.08
NPV = -$49,592.59 + $6,500 * 6.710081 + $8,500 * 3.108066
NPV = $20,441.50

NPV of the project is $20,441.50