Question

A project that provides annual cash flows of $11,300 for 9 years costs $60,209 today. a....

A project that provides annual cash flows of $11,300 for 9 years costs $60,209 today.

a. If the required return is 16 percent, what is the NPV for this project?

b. Determine the IRR for this project.

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Answer #1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=11300/1.16+11300/1.16^2+11300/1.16^3+11300/1.16^4+11300/1.16^5+11300/1.16^6+11300/1.16^7+11300/1.16^8+11300/1.16^9

=52053.95
NPV=Present value of inflows-Present value of outflows

=52053.95-60209

=-8155.05(Approx)(Negative)

b.Let irr be x%
At irr,present value of inflows=present value of outflows.

60209=11300/1.0x+11300/1.0x^2+.............+11300/1.0x^9

Hence x=irr=12%(Approx).

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