Question

Consider the following cash flows: Cash Flows ($) C0 C1 C2 −8,450 6,200 21,400 a. Calculate the net present value of the above project for discount rates of 0, 50, and 100%. (Do not round intermediate calculations. Round your answers to the nearest whole dollar amount.) NPV @ 0% $ NPV @ 50% $ NPV @100% $ b. What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number.) IRR %

Answer 1

a> NPV is calculated as the sum of all present values of cash flows

C0 C1 C2

-8450 6200 21400

When discount rate = 0%

PV0 PV1 PV2 NPV

-8450 6200/ (1+0) 21400 / (1+0)^2   

=-8450 = 6200 = 21400 =19150

In this case the NPV would be 19150

When discount rate = 50%

PV0 PV1 PV2 NPV

-8450 6200/ (1+0.5) 21400 / (1+0.5)^2   

=-8450 = 4133.33 = 9511.11 =5194.44

In this case the NPV would be 5194.44

When discount rate = 100%

PV0 PV1 PV2 NPV

-8450 6200/ (1+1) 21400 / (1+1)^2   

=-8450 = 3100 = 5350     =0

In this case the NPV would be 0

b> IRR of the project is determined as the rate of return for which the NPV of the cash flows becomes 0. In this case as already calculated above, the IRR is 100% (since NPV becomes 0). However, to apply formula,

-8450 + 6200/(1+r) + 21400 / (1+r)^2 = 0

On solving this, we get r =1

Hence the IRR is 100%

Hope this answers your question