East Coast Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $43000 a year at the end of each year for the next 14 years. The appropriate discount rate for this project is 7 percent. If the project has an internal rate of return of 9 percent, what is the project's net present value? a. If the project has an internal rate of return of 9%, then the project's initial outlay is $
IRR is the rate of return that makes initial investment equal to present value of cash inflows
Initial investment = annuity * [1 - 1 / (1 + r)n] /r
Initial investment = 43000 * [1 - 1 / (1 + 0.09)14] / 0.09
Initial investment = 43000 * [1 - 0.29925] / 0.09
Initial investment = 43000 * 7.78615
Initial investment = $334,804.4667
Project's initial outlay is $334,804.4667
NPV = Present value of cash inflows - present value of cash inflows
NPV = 43000 * [1 - 1 / (1 + 0.07)14] / 0.07 - 334,804.4667
NPV = 43000 * [1 - 0.38782] / 0.07 - 334,804.4667
NPV = 43000 * 8.74547 - 334,804.4667
NPV = $41,250.6567
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