Question

Robbins Inc. is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected.

r.	10.25%
Year	0	1	2	3	4	5
Cash flows	−$1,000	$300	$300	$300	$300	$300

a. $105.89

b. $111.47

c. $117.33

d. $123.51

e. $130.01

Reed Enterprises is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

r.	10.00%
Year	0	1	2	3
Cash flows	−$1,050	$450	$460	$470

a. $112.28

b. $92.37

c. $101.84

d. $106.93

e. $96.99

Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.

Year	0	1	2	3	4
Cash flows	−$1,050	$400	$400	$400	$400

a. 21.20%

b. 15.61%

c. 19.27%

d. 17.34%

e. 14.05%

Answer 1

Calculating NPV for Project of Robbins Inc

Discount rate = Cost of capital = r = 10.25%

We have the following cash flows

Cash Flow
Year	0	1	2	3	4	5
Cash Flow	-1000	300	300	300	300	300

We know that, present value of a cash flow = Cash flow / (1+discount rate)ⁿ where n = year of cash flow

NPV of the project = Cash flow in year 0 + Sum of present value of cash flows for year 1 to year 5 discounted at 10.25%

NPV of the project = -1000 + 300 / (1+10.25%)¹ + 300 / (1+10.25%)² + 300 / (1+10.25%)³ + 300 / (1+10.25%)⁴ + 300/(1+10.25%)⁵ = -1000 + 272.1088 + 246.8107 + 223.8646 + 203.0518 + 184.1739 = 130.0098 = 130.01 (rounded to two decimal places)

Since NPV is positive, hence project should be accepted

Answer. e. $130.01

Calculating NPV of Project of Reed Enterprises

Discount rate = Cost of capital = r = 10%

We have following cash flows

Year	0	1	2	3
Cash Flow	-1050	450	460	470

We know that, present value of a cash flow = Cash flow / (1+discount rate)ⁿ where n = year of cash flow

NPV of the project = Cash flow in year 0 + Sum of present values of cash flows for year 1 to year 3 discounted at 10%

NPV of the project = -1050 + 450 / (1+10%)¹ + 460 / (1+10%)² + 470 / (1+10%)³

NPV of the project = -1050 + 409.0909 + 380.1652 + 353.1179 = 92.3740 = 92.37 (rounded to two decimal places)

Since NPV of the project is positive, hence project should be accepted

Answer. b. $92.37

Calculating IRR for project of Spence Company

We have following cash flows for the project

Year	0	1	2	3	4
Cash flows	−$1,050	$400	$400	$400	$400

IRR of the project is the rate of return earned by the project such that NPV of the project is zero. At discount rate equal to IRR, sum of present values of cash inflows is equal to sum of present values of cash outflows

0 = -1050 + 400 / (1+IRR)¹ + 400 / (1+IRR)² + 400 / (1+IRR)³ + 400 / (1+IRR)⁴

We have find the IRR of the project using IRR function in excel

Formula to be used in excel: = IRR(Values)

where values are cash flows of the project

Using IRR fuction in excel, we get IRR of the project = 19.27%

Answer. c.19.27%