In: Finance
Question 1 16 Marks
Consider a project with the following cash flows:
Consider a project with the following cash flows:
Year Cash Flow
0 R17,500
1 -80,500
2 138,425
3 -105,455
4 30,030
Required: 1.1.Fill in the following table:
Cost of Capital (%) Project NPV
0
5
10
15
20
25
30
35
50
1.2.Use the values developed in part (1.1) to draw an NPV
profile for this project.
1.3.What is the IRR for this project?
1.4.Describe the conditions under which the company should accept
this project.
1.1) NPV calculated using NPV() function.
Year (n) | 0 | 1 | 2 | 3 | 4 |
Cash Flow | 17,500 | (80,500) | 1,38,425 | (1,05,455) | 30,030 |
Cost of capital (%) | NPV | ||||
0% | - | ||||
5% | (1.350) | ||||
10% | - | ||||
15% | 0.563 | ||||
20% | - | ||||
25% | (0.672) | ||||
30% | - | ||||
35% | 3.458 | ||||
50% | 41.481 |
1.2). NPV profile:
1.3) As can be seen from the cost of capital and NPV table, this project has four IRRs (rates at which NPV is zero) which are 0%, 10% and 20% and 30%.
1.4) A project is accepted when its IRR is greater than its cost of capital so that the project has a positive NPV. As can be seen from the cost of capital and NPV table, this will happen only when the IRR is 20% or 30% and the cost of capital is 15%. Under this condition, the project can be accepted.