Question

A project has annual cash flows of $6,000 for the next 10 years and then $5,000 each year for the following 10 years. The IRR of this 20-year project is 10.93%. If the firm's WACC is 9%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

At irr,present value of inflows=present value of outflows

Hence present value of outflows=Cash flows*Present value of discounting factor(rate%,time period)

=6000/1.1093+6000/1.1093^2+6000/1.1093^3+6000/1.1093^4+6000/1.1093^5+6000/1.1093^6+6000/1.1093^7+6000/1.1093^8+6000/1.1093^9+6000/1.1093^10+5000/1.1093^11+5000/1.1093^12+5000/1.1093^13+5000/1.1093^14+5000/1.1093^15+5000/1.1093^16+5000/1.1093^17+5000/1.1093^18+5000/1.1093^19+5000/1.1093^20

=45906.16

At WACC;Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=6000/1.09+6000/1.09^2+6000/1.09^3+6000/1.09^4+6000/1.09^5+6000/1.09^6+6000/1.09^7+6000/1.09^8+6000/1.09^9+6000/1.09^10+5000/1.09^11+5000/1.09^12+5000/1.09^13+5000/1.09^14+5000/1.09^15+5000/1.09^16+5000/1.09^17+5000/1.09^18+5000/1.09^19+5000/1.09^20

=52060.39

NPV=Present value of inflows-Present value of outflows

=52060.39-45906.16

=$6154.23(Approx)