Question

You are evaluating a project that costs $77,000 today. The project has an inflow of $164,000 in one year and an outflow of $67,000 in two years. What are the IRRs for the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Smallest -44.88 % Largest 57.87 % What discount rate results in the maximum NPV for this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %

I've received the first part but the last part was incorrect. I need the discount rate results in the maximum NPV for this project?

Answer 1

The cash flows are:

Year	Cash flow
0	-   77,000.00
1	164,000.00
2	-   67,000.00

Let the discount rate be "r"

Thus NPV = -77,000 + 164,000/1+r - 67,000/(1+r)^2

We need to maximize this and this happens when r = -18.29%

When r = -18.29% then 1+r = 1 - 18.29% = 0.8171

Year	Cash flow	1+r	PV
0	-   77,000.00	0.8171	-        77,000.00
1	164,000.00		200,716.42
2	-   67,000.00		-      100,358.21
		NPV	23,358.21

Thus the discount rate that leads to maximum NPV = -18.29%