Question

How do i solve this with a BA II Plus financial calculator?

A project that provides annual cash flows of $1,000 for eight years costs $4,900 today. Is this a good project if the required return is 8%? What if it’s 24%? At what discount rate would you be indifferent between accepting the project and rejecting it?

Answer 1

Annual Cash Flow = $1,000

Time Period = 8 years

Required Rate = 8%

Calculating Present Value of Project,

Using TVM Calculator,

PV = [FV = 0, PMT = 1,000, T = 8, I = 0.08]

Present Value = $5,746.64

As Cost of Project < Present Value of Project

It is a good project

Required Rate = 24%

Calculating Present Value of Project,

Using TVM Calculator,

PV = [FV = 0, PMT = 1,000, T = 8, I = 0.24]

Present Value = $3,421.22

As Cost of Project > Present Value of Project

It is not a good project

Calculating IRR of Project,

Using TVM calculator,

I = [PV = 4,900, T = 8, PMT = 1,000, FV = 0]

I = 12.40%

So,

At 12.40% rate one is indifferent in selecting the project.