a. Determine the internal rate of return of the following investment:
Period Cash flow 0 −$15,094
1 10,000
2 10,000
3 1,000
b Draw the net present value profile for the investment of A. Using a hand calculator and the rollback method described in the chapter, compute the net present value using a discount rate of 0.10.
a. IRR of the investment is found by using excel's IRR functions with cash flows as the input.
IRR is the rate at which NPV is zero.
IRR = 23.99%
b. NPV = Present value of the future cash flows - Initial investment
NPV = 10000/(1 + 0.10)^1 + 10000/(1 + 0.10)^2 + 1000/(1 + 0.10)^3 - 15,094
NPV = 9,090.9090909091 + 8,264.4628099174 + 751.3148009016 - 15,094
NPV = $3,012.68670173
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