Question

NPV A project has annual cash flows of $6,000 for the next 10 years and then $9,500 each year for the following 10 years. The IRR of this 20-year project is 12.14%. If the firm's WACC is 10%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations

Answer #1

Cash Flows:

Year 1-10 = $6,000

Year 11-20 = $9,500

IRR of project = 12.14%

Initial Investment = PV of Annual Cash Flows at IRR

Initial Investment = $6,000/1.1214 + $6,000/1.1214^2 + ... +
$6,000/1.1214^10 + $9,500/1.1214^11 + $9,500/1.1214^12 + ... +
$9,500/1.1214^20

Initial Investment = $6,000*(1 - (1/1.1214)^10)/0.1214 +
($9,500/1.1214^10)*(1 - (1/1.1214)^10)/0.1214

Initial Investment = $50,678.61

WACC = 10%

NPV = -$50,678.61 + $6,000/1.10 + $6,000/1.10^2 + ... +
$6,000/1.10^10 + $9,500/1.10^11 + $9,500/1.10^12 + ... +
$9,500/1.10^20

NPV = -$50,678.61 + $6,000*(1 - (1/1.10)^10)/0.10 +
($9,500/1.10^10)*(1 - (1/1.10)^10)/0.10

NPV = $8,694.26

So, NPV of this project is $8,694.26

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