Question

Suppose you are offered $8,000 today but must make the following payments:

  

Year	Cash Flows ($)
0	$ 8,000
1	−4,300
2	−3,000
3	−2,100
4	−1,300

  

a.	What is the IRR of this offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

   

b.	If the appropriate discount rate is 13 percent, should you accept this offer?
	Reject Accept

c.	If the appropriate discount rate is 20 percent, should you accept this offer?
	Reject Accept

  

d-1.	What is the NPV of the offer if the appropriate discount rate is 13 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d-2.	What is the NPV of the offer if the appropriate discount rate is 20 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

      

   

Answer 1

a.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $8,000.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 15.9980%16%.

b.If the discount rate is 13%, the offer should be accepted since the internal rate of return is higher.

c. If the discount rate is 20%, the offer should be rejected since it is higher than the internal rate of return.

d. Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $8,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 13%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is -$407.47.

e. Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $8,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 20%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of cash flows is $491.13.

In case of any query, kindly comment on the solution