Question

14. (Toolkit – Decision Rules – PBAK, IRR, NPV) Calculating NPV & IRR: Your next project provides an annual cash flow of $15,400 for nine years and costs $67,000 today. Is this a good project at 8% required return? How about 20%?

Question 14 options:

	Yes, Yes
	Yes, No
	No, Yes
	No, No

Answer 1

Correct option is > Yes, No

Reason: NPV is positive for 8% required rate of return and NPV is negative for 20% required rate of return.

NPV with 8% required return

Year	Cash flows = CF	Df = 1/(1+8%)^Year	Present Value = CF x Df
0	-67,000.00	1.000000	-67,000.00
1	15,400.00	0.925926	14,259.26
2	15,400.00	0.857339	13,203.02
3	15,400.00	0.793832	12,225.02
4	15,400.00	0.735030	11,319.46
5	15,400.00	0.680583	10,480.98
6	15,400.00	0.630170	9,704.61
7	15,400.00	0.583490	8,985.75
8	15,400.00	0.540269	8,320.14
9	15,400.00	0.500249	7,703.83
		Total PV = NPV =	29,202.07

NPV is sum of present values cash flows	NPV =	29,202.07
IRR is rate at which NPV = 0 and do trial error to get it	IRR =	17.67%

NPV with 20% required return

Year	Cash flows = CF	Df = 1/(1+20)^Year	Present Value = CF x Df
0	-67,000.00	1.000000	-67,000.00
1	15,400.00	0.833333	12,833.33
2	15,400.00	0.694444	10,694.44
3	15,400.00	0.578704	8,912.04
4	15,400.00	0.482253	7,426.70
5	15,400.00	0.401878	6,188.91
6	15,400.00	0.334898	5,157.43
7	15,400.00	0.279082	4,297.86
8	15,400.00	0.232568	3,581.55
9	15,400.00	0.193807	2,984.62
		Total PV = NPV =	-4,923.12

NPV is sum of present values cash flows	NPV =	-4,923.12
IRR is rate at which NPV = 0 and do trial error to get it	IRR =	17.67%