Question

A project has annual cash flows of $8,000 for the next 10 years and then $8,500 each year for the following 10 years. The IRR of this 20-year project is 8.39%. If the firm's WACC is 8%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

At IRR, Sum of (All present value of cash flows) = Investment or Initial cash outflow

Let’s calculate investment value by discounting cash inflows at IRR = 8.39%:

Year	Inflows	Df = Discounting factor = 1/(1+8.39%)^Year	PV= Inflows x Df
1	8000	0.922594	7380.75
2	8000	0.851180	6809.44
3	8000	0.785294	6282.35
4	8000	0.724508	5796.06
5	8000	0.668427	5347.42
6	8000	0.616687	4933.49
7	8000	0.568952	4551.61
8	8000	0.524912	4199.29
9	8000	0.484281	3874.24
10	8000	0.446795	3574.36
11	8500	0.412210	3503.79
12	8500	0.380303	3232.57
13	8500	0.350865	2982.35
14	8500	0.323706	2751.50
15	8500	0.298649	2538.52
16	8500	0.275532	2342.02
17	8500	0.254205	2160.74
18	8500	0.234528	1993.49
19	8500	0.216374	1839.18
20	8500	0.199625	1696.82
		Total = Initial Investment	77790.01

Now, we can calculate NPV with by plotting investment and by discounting cash flows @8%:

Year	Inflows	Df = Discounting factor = 1/(1+8%)^Year	PV= Inflows x Df
0	-77790.01	1.000000	-77790.01
1	8000	0.925926	7407.41
2	8000	0.857339	6858.71
3	8000	0.793832	6350.66
4	8000	0.735030	5880.24
5	8000	0.680583	5444.67
6	8000	0.630170	5041.36
7	8000	0.583490	4667.92
8	8000	0.540269	4322.15
9	8000	0.500249	4001.99
10	8000	0.463193	3705.55
11	8500	0.428883	3645.50
12	8500	0.397114	3375.47
13	8500	0.367698	3125.43
14	8500	0.340461	2893.92
15	8500	0.315242	2679.55
16	8500	0.291890	2481.07
17	8500	0.270269	2297.29
18	8500	0.250249	2127.12
19	8500	0.231712	1969.55
20	8500	0.214548	1823.66
		Total = Net Present Value	2309.20