Question

Answer Question 1-3

Project A has the following projected cash flows:

Year Cash Flow

0 -11,235

1 4,400

2 4,400

3 4,400

4 4,400

5 7,400

Q1) The NPV of the above project is $_____. Assume a discount rate of 6%.

a)9541 |
||

b)20776 |
||

c)17623 |
||

d)6388 |

Q2) The IRR for the above project is __ %.

a)21.09 |
||

b)26.76 |
||

c)33.95 |
||

d)31.25 |

Q3)Which of the following statement is correct?

a)If the discount rate increases, the IRR will decrease. |
||

b)If the discount rate increases, the NPV will stay the same. |
||

c)If the discount rate decreases, the IRR will turn negative. |
||

d)If the discount rate decreases, the NPV will increase. |

Answer #1

1)

NPV = present value of cash inflows - present value of cash outflows

NPV = -11,235 + 4,400 / (1 + 0.06)^{1} + 4,400 / (1 +
0.06)^{2} + 4,400 / (1 + 0.06)^{3} + 4,400 / (1 +
0.06)^{4} + 7,400 / (1 + 0.06)^{5}

**NPV = $9541**

2)

IRR is the rate of return hat makes NPV equal to 0.

NPV = -11,235 + 4,400 / (1 + R)^{1} + 4,400 / (1 +
R)^{2} + 4,400 / (1 + R)^{3} + 4,400 / (1 +
R)^{4} + 7,400 / (1 + R)^{5}

Using trial and error method, i.e., after trying various values for R, lets try R as 31.25%

NPV = -11,235 + 4,400 / (1 + 0.3125)^{1} + 4,400 / (1 +
0.3125)^{2} + 4,400 / (1 + 0.3125)^{3} + 4,400 / (1
+ 0.3125)^{4} + 7,400 / (1 + 0.3125)^{5}

NPV = 0

**Therefore, IRR is 31.25%**

3)

d)If the discount rate decreases, the NPV will increase. |

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