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A project has annual cash flows of $3,000 for the next 10 years and then $6,000 each year for the following 10 years. The IRR of this 20-year project is 13.22%. If the firm's WACC is 12%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.
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Step 1:Computation of Present value of Cashinflows:
Computation of Present value of Cash flows accruing from year 1 to 10
We know that Present value of Ordinary Annuity = C* [ { 1-( 1+i) ^-n} /i]
Here C = Cash flow per period
i= Rate of interest
n = No.of years
Present value of Cash flows accruing from year 1 to 10 at the end of year 0= C* [ { 1-( 1+i) ^-n} /i]
= $ 3000[ { 1-( 1+0.12)^-10 } /0.12]
= $ 3000[ { 1-( 1.12)^-10} /0.12]
= $ 3000[ { 1-0.32197} /0.12]
= $ 3000[ 0.67803/0.12]
= $ 3000( 5.65025)
= $ 16950.75
Present value of Cash flows accruing from year 11 to 20 at the end of year 10= C* [ { 1-( 1+i) ^-n} /i]
= $ 6000[ { 1-( 1+0.12)^-10 } /0.12]
= $ 6000[ { 1-( 1.12)^-10} /0.12]
= $ 6000[ { 1-0.32197} /0.12]
= $ 6000[ 0.67803/0.12]
= $ 6000( 5.65025)
= $ 33901.50
Hence Present value of Cash accruing from year 11 to 20 at the end of 10th year is $ 33901.50
Let us findout the Present value of Cash flows accruing from year 11 to 20 as on today ( t= 0)
We know that Future Value = Present value( 1+i)^n
Here i = Rate of interest and n = No.of years.
$ 33901.50 = Present value ( 1+0.12)^10
$ 33901.50= Present value ( 1.12)^10
$ 33901.50/3.10585 = Present value
$ 10915.3694 = Present value.
Total Present value of Cashinflows = PV of Cash inflows accruing from year 1 to 10+ PV of Cash inflows accruing from year 11 to 20
= $ 16950.75+$ 10915.3694
= $ 27866.12
Step 2:Computation of Initial Outlay:
Given IRR = 13.22%
We know at IRR , NPV should be 0.That means PV of Cash inflows is equal to the cash outflow
So to findout initial outlay we need to discount the future Cashinflows at 13.22%
Present value of Cash flows accruing from year 1 to 10 at the end of year 0= C* [ { 1-( 1+i) ^-n} /i]
= $ 3000[ { 1-( 1+0.1322)^-10 } /0.1322]
= $ 3000[ { 1-( 1.1322)^-10} /0.1322]
= $ 3000[ { 1-0.28891} /0.1322]
= $ 3000[ 0.71109/0.1322]
= $ 3000( 5.37890)
= $ 16136.70
Present value of Cash flows accruing from year 11 to 20 at the end of year 10= C* [ { 1-( 1+i) ^-n} /i]
= $ 6000[ { 1-( 1+0.1322)^-10 } /0.1322]
=$ 6000[ { 1-( 1.1322)^-10} /0.1322]
= $ 6000[ { 1-0.28891} /0.1322]
= $ 6000[ 0.71109/0.1322]
= $ 6000( 5.37890)
= $ 32273.40
Hence Present value of Cash accruing from year 11 to 20 at the end of 10th year is $ 32273.40
Let us findout the Present value of Cash flows accruing from year 11 to 20 as on today ( t= 0)
We know that Future Value = Present value( 1+i)^n
Here I = Rate of interest and n = No.of years.
$ 32273.40= Present value ( 1+0.1322)^10
$ 32273.40= Present value ( 1.1322)^10
$ 32273.40/3.4612 = Present value
$ 9324.3388 = Present value.
Total Present value of Cashinflows = PV of Cash inflows accruing from year 1 to 10+ PV of Cash inflows accruing from year 11 to 20
= $ 16136.70+$ 9324.3388
= $ 25461.04
Computation of NPV:
We know that NPV = Present value of Cash inflows -Initial Outlay
= $ 27866.12-$ 25461.04
= $ 2405.08
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